Personal Finance

I'm 41 with no kids and no debt - how should I factor in my $500k in a 401(k) into my early retirement plans?

Kristin Hitchcock

Published: December 11, 2024 1:49 pm

In the realm of FIRE (Financial Independence, Retire Early), achieving a comfortable lifestyle with minimal financial worries involves more than just hitting a certain number in your bank account. I recently came across a post on the r/chubbyFIRE subreddit that discussed when and how to tap into retirement accounts, like a 401(k).

Retirement accounts often have certain restrictions, which can make using them while planning to retire early challenging!

I liked this Reddit post because it explores how early retirees plan to use their 401(k) (or even if they should have a 401(k)).

Key Points from This Article

• Incorporating your 401(k) into your early retirement plan requires balancing short-term cash management and long-term growth.
• The hard part is determining how much you can rely on your 401(k) as part of your net worth while still focusing on liquidity.
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

Redditor Overview

Let’s review some of the basics about the information provided in the Reddit post:

• Age: 42
• Net Worth (NW): $5.5M (including $3.5M invested assets, $550K in 401(k), and real estate)
• Monthly Spend: $10K-$15K, with potential increases for travel
• Income: $750K-$950K annually, with plans to decrease income in the near future
• Goal: To have $5M invested outside of 401(k), aiming for a more flexible, less rigid retirement plan.

This individual is planning to slow down in the next 2-3 years, with the primary goal of figuring out their Safe Withdrawal Rate and long-term financial strategy. They aren’t sure whether to count their 401(k) as part of their available wealth, even though they cannot access it until much later.

What are some things this poster should consider when thinking about their 401(k)? Let’s take a look:

1. 401(k) and Access Delays

The 401(k) presents a unique challenge in FIRE planning. While the 401(k) does add significantly to one’s net worth, it isn’t accessible without penalties until age 59½. If you decide to retire earlier than that, you cannot access any of your 401(k), which makes planning a bit more complicated.

Some individuals completely exclude their 401(k) from immediate retirement planning, and this is something we regularly recommend, too. Instead, it’s often better to think of your 401(k) as an emergency fund or to fund expenses that tend to rise in later life, like healthcare.

2. Taxed vs. Untaxed Accounts

Taxable investment accounts (outside of retirement accounts) are often seen as the more flexible source of funds for early retirement. These accounts are not bound by age restrictions, so you can access them in early retirement. However, they also come with their own set of tax implications. Gains in taxable accounts are taxed based on capital gains rates.

On the other hand, 401(k) retirement accounts have the benefit of growing tax-free, but they come with the penalty of delayed access.

3. Strategizing for a Slower Retirement

A major question for ChubbyFIRE participants is how to manage the “cash burn” in the years between early retirement and when 401(k) funds become available. The individual in this post intends to slow down their income in the next 2-3 years.

Our suggestion would be to rely on taxable accounts for immediate expenses while leaving the 401(k) funds untouched for later. You can focus on taxable accounts for the “first phase” of retirement, shifting to a 401(k) or other tax-advantaged accounts when they become available.

4. Safe Withdrawal Rates

Determining a safe withdrawal rate is vital for retiring early. How much money can you take from your investments without running out of funds? Typically, the 4% rule is suggested, meaning one can safely withdraw 4% of their initial nest egg per year. However, for those with substantial wealth (as seen in the post with a spend of $10K-$15K per month), a more conservative SWR may be advisable.

When you retire early, we typically recommend choosing a safe withdrawal rate of closer to 3% or 3.5%.