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August 31, 2011

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fred doe

net worths are weird? since i've retired i've gottin three different net worths for different things, (none for borrowing money) and the difference is about $200,000 some ask for debt some don't? some make you, go" wow i'm worth that" and some make you ask, "is that all". such as long term vs short term investment? i go with the middle one myself.

deegee

For someone who retires early (like me, at 45, three years ago), I think there are two phases to planning a long-term budget. The first part is making it intact to age 60 or 65 and the second part is after that. I say this because once I get to age 60 or 65 I will have access to money I could not easily (if at all) access before age 60. These "reinforcements" include unfettered access to my IRA, my frozen company pension, and Social Security. Furthermore, at age 65 (at least for now), I will become eligible for Medicare and greatly decrease my health insurance expenses.

This is also why I have more of my investments in my readily available taxable accounts than I do in my IRA although I have a good amount in the latter.

Beingretired.wordpress.com

Nice series! I think it demystifies the question of how much and debunks the idea you need millions and millions to retire. Early retirement is possible for just about anyone with a little discipline.

dgpcolorado

@deegee, Your mention of unfettered access to retirement accounts is a valid concern. However, there is a way to tap traditional IRAs before age 59½, without the 10% penalty, which few people know about: by taking payments in the form of an annuity (it used to be called SEPP: Substantially Equal Periodic Payments). I knew of this option before I retired, but the usual method of calculating payments, based on the same life expectancy charts as are used for the age 70 mandatory withdrawals, provided too little money to live on. However, there are two other methods of calculating payments, amortization and annuitization, that can allow for much larger withdrawals. The downside of doing this is that one must follow rules carefully and continue the payments for five years or until age 59½, whichever is longer. Fail to do that and one must pay penalties all the way back to the first early distribution. SEPP using an amortization calculation was my ticket to early retirement. And one can split IRAs up as much as one likes and just tap one, in order to fine tune the amount needed, leaving others in reserve.

Information on early withdrawals from IRAs is found in IRS Publication 590:
http://www.irs.gov/publications/p590/index.html

The relevant passage about taking early withdrawals in the form of an annuity:

"Annuity. You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59½. You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The 'required minimum distribution method,' when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.

There are two other IRS-approved distribution methods that you can use. They are generally referred to as the 'fixed amortization method' and the 'fixed annuitization method.' These two methods are not discussed in this publication because they are more complex and generally require professional assistance. For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at www.irs.gov/pub/irs-irbs/irb02-42.pdf."

I had my amortization calculation done by a local CPA but it turned out that Fidelity Investments, where my IRA accounts are located, will also help with the calculations at no charge. The main variable is deciding on what interest rate to use, it must be reasonable in the eyes of the IRS but still generate the desired income stream.

deegee

dgpcolorado, I have seen this mentioned in investment and early
retirement forums. But be assured, having to use this 72t thing is way,
way down on my list of sources of income before I turn 59.5 years old. I
am also a Fidelity client so if I were in such a dire spot where I had to
tap into this, I would seek out their assistance, too.

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