[USER]

Our goal is to retire early at 55. We are 44 and 39. We were so focused on maxing out our 401ks and IRAs that we lost track of our bridge account.

My employer matches at 6% and my wife’s matches at 6% plus 4% profit share.

The employer match and profit share itself account for $28k contributions. Our retirement accounts are currently worth $1.1M and taxable accounts at $210K.

Does it make sense to reduce our 401k contributions to the employer march to fund the taxable accounts?

[Rick]

I believe the decision may be driven by by factors that you did not share.

Do you plan on a large liquidity event that would instantly completely or partially fund your “bridge” account needs?

For many people that is a sale of your primary residence to either downsize or change to renting.

Either way that will free up hundreds of thousands to immediately land in your brokerage account.

Funding a brokerage account now and for years to only have the exact need met by selling your primary residence would frustrate most people causing regret on any tax savings that could/should have been achieved over all those years.

But a primary residence house sale is just one of many reasons for a liquidity event.

Others can be sale of a rental property, sale of a business, sale of a large espp or stock grant, inheritance, lawsuit settlement, etc. Clearly various degrees of certainty.

Too many people strive too early for some sense of “balance”. There are no points for balance years too soon.

If you only need balance going into retirement, it can literally achieved on your last day before retirement.

[Bill]

It depends, but in general, no. You can do 72t withdrawals from Ira’s or rule of 55 from 401k. And if all else fails, you can at the 10% penalty.

That’s often less than the tax savings from the initial deduction. Of course, you would want to look at your individual income/spending/tax situations.

Most FI people drop down a tax bracket or 2 in retirement, but you might be a FatFire person or have a massive pension or rental income or etc.

[Aaron]

Run the calculations. How much do you need in your bridge account to cover those spending years between 55 ans 59.5?

Will you get there with your current contributions plus 10 years of growth?

[Sarah]

Just out of curiosity- are you high income earners? How did you get to where you are?

Good savers?

[Amy]

There are ways to access your retirement accounts before age 59.5. You could set up a 72t (SEPP) or build a Roth conversion ladder.

There is also the IRS’ Rule of 55 if your employer makes that option available.

You could also geoarbitrage. You could combine one or more of these options with a bridge account to meet your spending needs in early retirement.

Keep in mind too both your retirement accounts and your taxable accounts will roughly double over the next 10 years assuming you’re getting an average 7% return (the Rule of 72).

[Mwikali]

You can also employ rule of 55 at your retirement. But reducing 401k contributions is also an option.

[Joel]

NO! If your goal is to retire at 55, you can use the Rule of 55 to start drawing from your 401k accounts penalty free!

In addition your taxable brokerage accounts will likely double or more in real dollars between now and when you retire, assuming you are investing tax efficiently and holding only equity index funds there.

That means your taxable bridge accounts will probably have around $500,000 by the time you retire … even if you don’t contribute another dime to them.

Instead I’d probably focus on how you plan to handle health insurance coverage. If you are planning to use ACA Marketplace insurance, will you be dependent on premium tax credits?

If so, you may want significant sources of tax free funds during your bridge years.

You can draw on taxable brokerage assets for some of that, but I’d recommend you look to HSA and Roth IRA balances as well.

To help load up your Roth IRA, consider making some of your 401k contributions Roth or making Mega-backdoor Roth 401k contributions.

Once you retire you can rollover the Roth 401k to a Roth IRA and withdraw all of your contributions tax and penalty free even before you turn 59 1/2.

Regardless, investing in tax advantaged accounts is usually your best option. And at the most you will need 5 years of expenses in taxable accounts to cover the first 5 years of a Roth IRA conversion ladder.

But since you plan to retire at 55, I doubt you will need that much.

[Author]

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