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Thread: Financial Independence

  1. #21
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    Quote Originally Posted by Macheath View Post
    you can put money into a Trad IRA and transfer convert it from there to a Roth IRA (this is known as a "backdoor Roth" and is a loophole that has yet to be closed).
    The correction may seem nit-picky, but they're quite different transactions in practice. A transfer counts as a withdrawal (which would be taxed/penalized) and deposit (which is subject to maximums) where a conversion doesn't. In reality though, just call up whoever has your Traditional IRA and tell them you want to make it a backdoor Roth IRA. They'll know what to do.

    Quote Originally Posted by Macheath View Post
    Yeah, there's some monkey business you've got to go through to slowly transfer money out of your retirement accounts, if you plan to retire before 59. I haven't looked into it in too much detail, but within ~5 years of my intended retirement date, I certainly plan to.
    I've looked into it a bit. Essentially you need:
    1. Retirement Accounts to cover your expenses forever
    2. Cash and/or taxable investments to cover your expenses for 5 years


    Once you have that, you retire. For the next 5 years you live off of your cash and taxable investments. Meanwhile, each year, you roll over a portion of your Traditional 401(k) (or Traditional IRA) to a new roth IRA. This is a taxable distribution from your 401(k), but it avoids penalties. You aren't working so your income aside from the distribution could be as low as 0, this minimizes the taxes you'll pay on the distribution.

    Rollovers from Trad 401(k)s to Roth IRAs can be withdrawn from the Roth IRA without penalty or tax after 5 years. So, do one rollover every year from early retirement to retirement age, live off of cash/taxable investments for the first 5 years, then live off of distributions from rollover Roth IRAs from early retirement to retirement age. This is called setting up a Roth pipeline.

    Quote Originally Posted by Threnn View Post
    Also, her employer site seems to offer the Roth without the income restrictions (they mention that banks/etc have the restriction, but employers that offer it don't). The Roths available are a Supplemental or a 457. And thus they behave like those as well.
    Roth is a classification as opposed to a type of account. Mac was talking about IRAs above. Those have income limits in regards to the available tax benefits. There are also Traditional and Roth 401(k)s and 403(b)s. I don't think they have any income restrictions.

  2. #22
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    Quote Originally Posted by liuv View Post
    The correction may seem nit-picky, but they're quite different transactions in practice. A transfer counts as a withdrawal (which would be taxed/penalized) and deposit (which is subject to maximums) where a conversion doesn't. In reality though, just call up whoever has your Traditional IRA and tell them you want to make it a backdoor Roth IRA. They'll know what to do.
    You're right, it's a "conversion." Mechanically, at Vanguard, you sell the shares in the Trad IRA to fund a purchase in the Roth IRA (using their "exchange" mechanism). It's that simple, and it resembles a transfer of funds, so I misspoke. But they even say "convert" on the page that tells you how to do a backdoor Roth.

  3. #23
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    Quote Originally Posted by liuv View Post
    Roth is a classification as opposed to a type of account. Mac was talking about IRAs above. Those have income limits in regards to the available tax benefits. There are also Traditional and Roth 401(k)s and 403(b)s. I don't think they have any income restrictions.
    Ah. I see what you're saying. I was just pointing out that the types of Roth available through her work were the kind that ignored the income requirement. Which seeing the requirements, I don't think it matters anyway (for us).

  4. #24
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    Here is a question I have: How is 32k/yr doable?

    4% safe withdrawal coming in at 32k/yr sounds low to me. My estimate for bills comes to ~2k/month (24k annually). That is off my very diligent tracking of our current bill situation, but modifying it to reflect having the house paid off, only having 1 car, etc. That includes pretty much everything (electric, gas, phone, food, prop taxes) except for health insurance- which clearly will be a factor for someone looking to retire pre-62.

    It also doesn't include vacations, or helping kids with college costs. But mainly... it doesn't include vacations.

    When we're looking at it, we figure we need at least 40k/yr, but 50k-60k would be preferable. We by no means are extravagant, so I'm wondering if I'm missing something that makes 32k/yr doable.

  5. #25
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    Quote Originally Posted by Threnn View Post
    Here is a question I have: How is 32k/yr doable?
    It is for me. Maybe it isn't for you. You've got to figure out your own number.

    Quote Originally Posted by Threnn View Post
    4% safe withdrawal coming in at 32k/yr sounds low to me. My estimate for bills comes to ~2k/month (24k annually). That is off my very diligent tracking of our current bill situation, but modifying it to reflect having the house paid off, only having 1 car, etc. That includes pretty much everything (electric, gas, phone, food, prop taxes) except for health insurance- which clearly will be a factor for someone looking to retire pre-62.

    It also doesn't include vacations, or helping kids with college costs. But mainly... it doesn't include vacations.
    If you're going to need more than $8k/year for vacations, you have some splendid plans for retirement.

    Quote Originally Posted by Threnn View Post
    When we're looking at it, we figure we need at least 40k/yr, but 50k-60k would be preferable. We by no means are extravagant, so I'm wondering if I'm missing something that makes 32k/yr doable.
    Having a house paid off and no kids helps a lot. You've given due consideration to the house; might I suggest you also ponder the money-saving move of murdering your offspring?

  6. #26
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    Quote Originally Posted by Macheath View Post
    It is for me. Maybe it isn't for you. You've got to figure out your own number.
    Well that is why I'm asking- how did you get to 32k being doable? What assumptions for bills/expenses do you have?

    If you're going to need more than $8k/year for vacations, you have some splendid plans for retirement.
    But there isn't 8k for vacations. There is 8k for health insurance coverage for 2 people aged ~55 or so. How much of 8k will even cover 1 person for a year?

    Even so, going to Disney is 2500$ for one 10-day trip (2014 prices at a _value_ resort), not including tickets to the parks. A single cruise for two is ~3k. And by no means is that a "throw money down the casino" cruise (just some money). So even if that 8k was all for vacations, we're looking at 3 vacations per year.

    I don't think that is "splendid" by any stretch. But yeah... we want to have at least around 10k a year on top of "living" for taking vacations. That seems reasonable to me.

    Offing my offspring does not seem reasonable. If I do so, there won't be anyone around to fight over inheritance.

  7. #27
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    Well first of all, my napkinesque calculations have told me I'm a minimum of ~10 years from retirement. So I haven't bothered doing anything more precise yet; a lot can change in ten years. As I approach the date, I'll improve the numbers on both sides of the equation -- income and outgo -- and narrow in on a reliable set of targets. For now, I'm just concentrating on minimizing my current expenses and maximizing my savings. Doing it for several years will only give me a better idea of what the ultimate picture is, as I show myself what I'm capable of.

    But what's something I don't expect to change in the next ten years? I don't like to spend money, and I'm not a big fan of travel. To me, $3000 for a vacation is fairly extravagant, and the notion of doing it three times in a single year is beyond the pale.

    Like I said... what works for me may not work for you.

    All of my numbers are for a single guy with no kids, too. I might fall desperately in love with a woman who's $400,000 in debt in the next ten years, who knows? Or I might just fall off a ladder. Either could certainly throw my meager plans into a tailspin.

  8. #28
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    In the off chance of a ladder related mishap, can I be your ward/heir?

  9. #29
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    Mac, if you assign me as your beneficiary I'll take you skydiving! Come on, haven't you always wanted to go skydiving? My treat!

  10. #30
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    This thread has reinforced my view that my wife and I were stupid and got into way too much debt in our twenties. I suppose the upside is we realize that and are fixing the problem. This also reinforces my view that I'm going to beat financial lessons into my children so they are smarter than I was starting my adult life.

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