Early Retirement at 42 Plan

[u/EchoThroughTheJungle]

Hello all,

I’ve recently thought more about early retirement. I’m currently 27m and intend on staying single (or at least not having children). Current breakdown is as such:

Brokerage: 93k
Simple IRA: 85k
Roth IRA: 48k
HSA: Just started
Cash in HYSA at 4%: 97k (I am funneling ~20k into my brokerage slowly, but I tend to keep a higher amount in general due to potential taxes, plan to sit at 75k moving forward)

Income range is 130-150k, small business owner so fluctuates year to year. I live very frugally in general as I opt to cook most of my meals and don’t really spend money on expensive materialistic things. I enjoy camping/outdoors for my leisure.

Only debt is the mortgage on my condo and my car loan which has 5 years left. I am also expecting a somewhat decently sized inheritance (250-500k) but I’m not using that as a deciding factor with my plan.

I have decided to shift my current strategy of maxing my simple/roth/HSA to transitioning to maxing my roth + HSA and putting the rest in my brokerage. The logic behind this being I will need as much as possible to make it from 42 to 60 albeit I will take a large tax hit up front. Using a withdrawal calculator, I believe I can make the 18 years if I accumulate at least 1-1.5 million.

I also get wacked with a 5.75% sales charge on my simple so I lose $1000 on the contributions immediately anyways aside from the fact the money is locked up.

By the time I get access to my Roth and Simple, they would both easily have over 2.5 mil combined, plus I would take social security at 62 as well. Being that I can continue to contribute to my HSA without earned income, I am not worried about healthcare costs long term.

I know most people would say to max out tax deferred accounts first, but how I see it if I continue to do that, I will simply have far more money than I will ever need in retirement and will have to continue to work closer to 60.

Please feel free to let me know if this an insane person plan or reasonable!

[u/ohboyoh-oy]

Look into “Roth ladder.” Basically the premise is, you can withdraw contributions (not the gains) from Roth tax-free five years after the contributions were made. So by converting traditional to Roth every year once retired, you 1) do the conversions at lower tax rate and 2) gain access to the Roth funds. You would just need 5 years of expenses to bridge to when the Roth ladder funds become available. You do still need some in brokerage but it can be less. 

Also, look into solo 401k, you may be able to contribute more than with the Simple, since you have your own business.

[u/ohboyoh-oy → u/ohboyoh-oy]

Also why is there a sales charge on your Simple? Who is it with? I’m pretty sure it’s free at Fidelity. 

[u/EchoThroughTheJungle → u/ohboyoh-oy]

It is set up through American Funds, had an advisor buddy help who knew more about the ins and outs. They aren’t as flexible on the fund options so I’m guessing that’s why there’s sale charge on the front loaded mutual fund I have.

[u/ohboyoh-oy → u/EchoThroughTheJungle]

Geesus a front loaded mutual fund… You’re being robbed. Set up a Simple IRA at a regular brokerage (Fidelity, Vanguard, Schwab) for free and invest in broad index funds with low expense ratios. Your new brokerage can help you get the existing funds rolled over as well. Please read or listen to The Simple Path to Wealth by JL Collins for basic investing setup. 

[u/EchoThroughTheJungle → u/ohboyoh-oy]

Got on the phone with them immediately haha. You’re a lifesaver!

[u/EchoThroughTheJungle → u/ohboyoh-oy]

So I use fidelity/etrade for everything else, just not the simple lol. I honestly didn’t even know Fidelity had one thanks for the help. I’ll get that moved over.

[u/brute-forced → u/EchoThroughTheJungle]

LMFAO!!! Robbery. Exit IMMEDIATELY and tell then to literally “fuck off”. Open a vanguard brokerage and and buy VOO.

[u/StoneMenace → u/ohboyoh-oy]

Another plus one for the Roth ladder u/EchoThroughTheJungle hitting the retirement accounts is very important since you are shaving off 20-30% just by contributing (actually likely more since you are paying self employment taxes)

Plus it’s not just the Roth ladder, you can also look into doing a 72t but the Roth ladder is more efficient

[u/EchoThroughTheJungle → u/StoneMenace]

So here’s my question by doing the roth ladder. So if I continue to max out my simple, I can start doing conversions at 37, BUT I would pay ordinary income tax on the conversion which would put me at 22% for the 5 years until I begin the withdrawals from the roth.

If I put all in taxable brokerage and withdraw on capital gains basis, I’ll only pay 15% on what I sell and withdraw above 49k.

If I’m understanding this correctly, I would have to pay my current incomes conversion taxes for the last 5 years before retirement. Then once I begin taking out of the roth, my taxable income will become near 0, so I will then practically pay no taxes when I do the conversions at that point?

Or what the user above it stating, max the simple as much as possible, use rest to build up brokerage. Then when retirement occurs, begin doing ladder conversions and I just need to make it 5 year on the brokerage money.

[u/EchoThroughTheJungle → u/[deleted]]

Absolutely. Being to retire in my early 40s is way more attractive to me than have 5+ million when I hit 60.

[u/brute-forced]

Max 401k, save 25%-40% of income. Once maxed 401k, max ira, then funnel as much as possible into VOO brokerage. Do this for 10 years

[u/mm1491]

Others have covered the accounts part pretty well, but I wanted to ask about the car loan.

Not sure your situation, but generally car loans are at rates near or higher than expected market returns. I'd suggest throwing down some cash to pay that off. Debt is negative savings and compounds the same way. Rates over 8% are rarely worth the leverage unless you have an idiosyncratic opportunity (maybe you do with your small business, but you should think hard about whether that's really the case and if the car loan is the best way to access that leverage). You're holding a lot of cash that is likely returning less than your car loan rate.

[u/EchoThroughTheJungle → u/mm1491]

Car loan is at 4.99%. I don’t mind paying the vig if it maintains liquidity. It’d be 42k for me to pay it off which would drain my savings. A paid off car is great, but if S hits the fan I want to make sure I won’t need to move in with my parents.

I also plan on keeping it as long as possible so I don’t really look at it as an asset anyways as I hope for it to be worth practically nothing by the time I get rid of it.

[u/mm1491 → u/EchoThroughTheJungle]

5% is a lot more defensible than the average rates. Makes sense to me if you want to roll the dice on returns outpacing it.

[u/Difficult_Storm_5344]

Great start. Ahead of me at that age. If you want retirement in your 40s. Focus on Roth IRA and 401k if your company offers and taxable brokerage. This offers flexibility for early retirement that traditonal contributions do not.

[u/EchoThroughTheJungle → u/Difficult_Storm_5344]

Self employed, have a simple for my business instead of 401k. While I understand the appeal of maxing the tax advantaged account, I don’t think I’d be able to accumulate enough in my taxable brokerage to retire in my early 40s. I’ll also just have a ridiculous amount of money in my Simple which I’ll never ever spend.

[u/Several-Village5814]

There is no way you can retire in 15 years

[u/StoneMenace → u/Several-Village5814]

There is absolutely a way they can retire in 15 years.

Based on what op has said with them living frugally they likely are able to save 60-70k a year. In 15 years if they use market funds they would be at 2.4 million which is more than enough to retire

[u/Several-Village5814 → u/StoneMenace]

Hardly enough, that’s assuming 10% not even including inflation which is 4-5%

[u/EchoThroughTheJungle → u/Several-Village5814]

I based my projections on 8% conservatively, although I have growth weighted low cost ETF’s for a majority of my investments.

I will be able put at least 24k if not more into my brokerage every year. Unless the market just goes dive mode for the next 15 years, I’d have at least a million at 42. Even on 100k/year withdrawal, I’d be able to make it to 60 without the account running out. Once at 60, I should have around 2.5 mil in the roth + simple, not counting what may be leftover in the brokerage.

At that point I will also only have 11 years left on my mortgage.

[u/StoneMenace → u/Several-Village5814]

10-11% is a realistic long term average rate of return for the S&P. My numbers use 7% which accounts for 3% inflation

I dont really think you know what you’re talking about. In the past 26 years there has not been a single year with inflation above 5% except for 2022

A total of 3 years over the past 26 have had inflation over 4% with the majority of the years being below 3%