Saving and investing question

[acidflea]

First off I am new to this site and hope to learn a lot from it. I am 40yrs old and I have been thinking about what I need to do now to get financially able to retire early. I wanted to see what the best way to save/invest is. I do participate in 401k but that money will not be available if I retire early without paying a penalty. I wanted to find out the best options for saving/investing that will allow me to use that money at whatever age I decide to retire.

Thanks

[prognastat]

There are actually ways to access 401k/retirement funds without penalty early, but there is some additional management involved. It requires you saving up 5 years of expenses in non retirement accounts, converting your Traditional 401k to a Traditional IRA then converting 1 years worth of spending every year from Traditional IRA to Roth IRA and after 5 years you can take out the deposit you made 5 years prior penalty free.

Roth Conversion Ladder
https://www.madfientist.com/how-to-acce ... nds-early/

Another option is HSA. You get to put pretax money in so it lowers you taxes. The money grows tax free. If you take the money out for healthcare reasons you also don't pay taxes. After 65 the money can also be taken out penalty free for non healthcare reasons. You can also not use it to pay medical bills, but hold on to your receipts and cash our the expenses from the HSA at a later time to let the invested money grow tax free for a longer time.

https://www.madfientist.com/ultimate-re ... t-account/

If you don't want to go through this additional management you would want to use after tax accounts instead such as Vanguard.

Also Roth deposits(not the growth) can be withdrawn penalty free.

[EdithKeeler]

You can access your 401k Money early using 72(t) substantially equal periodic payments.
Details here: https://en.m.wikipedia.org/wiki/Substan ... c_payments

You can also access your 401k early if you leave the employer that administers your 401(k) the year you turn 55. (Can’t access an old employer’s 401k if you left it there when you changed jobs and didn’t roll it over).
https://www.google.com/amp/s/amp.cnn.co ... index.html

[EdithKeeler]

You might also want to see if your company offers a Roth 401k. Mine recently started offering one, and I’m now putting my non-matched money in the Roth.

I don’t want to jump through all those conversion hoops, myself, and really you shouldn’t have to if you plan ahead.

I’ve got money now in regular 401k (I rolled everything into my current employer’s, because it’s excellent—low fees, good options), Roth 401k, and a tiny bit in a taxable account. I also have an HSA, that I don’t use for medical stuff unless I really have to. As P mentions, an HSA offers some good options.

[acidflea]

I appreciate all of the replies from everyone. I do have a couple questions.

So if my employers HSA doesn't allow investing do you still recommend maxing it out and use as a savings account?

When turning 55 can i access money in my 401k even if part of it was rolled over from a previous employer 401k to current employer 401k? I wasn't sure if any specials rules apply to 401k money that was moved from previous employer to current employer.

[EdithKeeler]

I personally would still put the money in the HSA. It goes in pre-tax, so even if you can’t invest the money, you still come out ahead.

Yes, the $$ you roll over from a prior employer is still accessible the year you turn 55, with no penalty.

You might want to double check your employer on the 55 thing. It’s allowed under IRS rules, but I don’t think employers have to allow it.

[acidflea]

I still owe on my mortgage. Would you suggest paying extra funds to that like I do now or invest the extra funds? I usually pay the normal payment plus half per month and a full extra monthly payment or two per year.

[DutchGirl]

I still owe on my mortgage. Would you suggest paying extra funds to that like I do now or invest the extra funds? I usually pay the normal payment plus half per month and a full extra monthly payment or two per year.

So you're already paying the mortgage faster than necessary. Personally I would leave it at that, if your mortgage interest rate is 4% or lower.

The reason: it is likely that if you invest this money instead, you will come out with more money in the end, due to the fact that the investments will likely have a higher return per year than what your mortgage interest rate is.

However, investing (in low-fee index funds) is a bit more risky than paying down a mortgage. Although, in the long run I do believe that it will be more profitable. So I would choose the higher risk (investing) in return for a probably higher profit.

[EdithKeeler]

The problem with paying down the mortgage early is the illiquidity. Basically, if something comes up and you need the cash, you may not want to sell your house, you might not be able to sell your house. You can always do a loan or a hardship withdrawal from your retirement account.

That said, I do pay extra on my rental property mortgage, but I’m not paying it down aggressively. Meaning I add a bit to the principal every month, but not at the expense of my other investments.

But I think for a lot of people there’s a lot of security in a paid-for house. But right now your mortgage is also the cheapest money, probably, that you’ll ever borrow

I think that you have to sit down and do some math to figure out what’s best for you.

[suomalainen]

So you're already paying the mortgage faster than necessary. Personally I would leave it at that, if your mortgage interest rate is 4% or lower.

The reason: it is likely that if you invest this money instead, you will come out with more money in the end, due to the fact that the investments will likely have a higher return per year than what your mortgage interest rate is.

Agree with @DG, so long as you replace "fact" with "opinion". If you think investments will return more than 4%/year, then the math would say go with investments, but if you have the opposite conviction, then choose differently. Also, psychology is more important (more visceral) than math, so if one gives you more peace of mind than the other, include that in your calculus.

Consider also: what investment gives you a 4% risk free guaranteed return?

The problem with paying down the mortgage early is the illiquidity.

I thought this too. Then I read an MMM article that a HELOC can give you that liquidity, for essentially no cost. I now have a HELOC as my "emergency savings" account rather than paying >2% on a mortgage while earning <2% in a savings account. Sometimes I regret not putting the extra into stocks given the market's continuous rise over the 11 years I've had a mortgage/house, but hindsight's 20/20.

[Mister Imperceptible]

I’ve been thinking about a HELOC as Suo mentioned.

It’s nice to have liquidity. Also, if your mortgage rate is low, with rising rates the drag rate between your mortgage interest and cash deposit interest will be minimal or may even invert. You might get paid more on your cash desposits than you are paying in mortgage interest(!).

Alternatively, Ally Bank or the other high yield bank accounts could close operations and you would lose access to the funds you were using to pay your mortgage (black swan). Make sure you have cash invested directly with the US govt in the form of Treasuries. Or even physical notes and coins.

Another potential black swan is that your house gets destroyed and your insurance company is unable or unwilling to pay out your insurance policy. If your house is paid off, you just lost all those funds. So much for piece of mind.

A lot of people on the forums might think the stock bull market will end soon and a big drop would put a damper on your returns. Look up “sequence of returns risk.” Be conscientious of how you invest funds not being used to pay the mortgage off early. You will find alternative ideas on this forum to putting 100% of your money into low-cost index funds.

[Nomad]

For myself I am mainly saving via a penions because it is the most advantage way to save and I can get that money at 55.
However, I'm also saving 'now' money from takehome pay that I can use at any time.
You could try and calculate how much 'now' money you will need to take you upto your official early retirement age when you can access your pensions.

[acidflea]

I see calculators for calculating total saved to live off 4% etc. Is there a good way to calculate how much of that total savings should be in 401k vs other accounts that you can access before a certain age without paying penalties? Most everything I have saved now is in 401k but need to save money that I can access if I decide to retire early.

Thanks

[prognastat]

If you are going for a 4% withdraw rate you'd want 25x your annual spending saved, if you are going with 3% you'd want 33x.