In the last series post we discussed ways to reach early retirement through a combination of taxable investments and retirement contributions that may be withdrawn before traditional retirement age. This post picks up where the other left off; we’ve now reached that golden age of 59 1/2 and may begin withdrawing from our traditional retirement plans.

Should we invest in both a Roth IRA and a 401(k)? Should I count on social security income, and if so, should we elect to receive early payments? What alternative investments can we make to fund retirement?

Forget Everything You Thought You Knew About Retirement

Our strategy for retirement is different from the more traditional idea of working somewhere 40 years, retiring, and drawing social security for the next two or three decades (hopefully). Our plans for retirement have been influenced by a shift in some of the long-held financial beliefs.

Things like a guaranteed 8% return in the markets may be soon be a distant memory. Sure, some years will be good and some bad, just as it always has. However, I suspect there will be more volatility and negative financial news than anyone my age remembers. So our plans have been molded by life experiences, the political climate, and even larger economic trends that have developed in our lifetimes. Our investments will be more conservative, and we will always lean to being “cash heavy,” because we value preparedness over the chance of hitting it big.

Maximize Roth IRA Contributions

Each year, my wife and I will contribute the maximum amount to a Roth IRA. I’m a big fan of the Roth IRA, for several reasons. First, the earnings in a Roth IRA grow tax free, and since you are using after-tax dollars, contributions can be withdrawn at any time, for any reason (making the Roth sort of a 2nd pseudo-emergency fund).

The Roth IRA also has no mandatory distribution age, meaning if you hit 59 1/2 and don’t want to tap your Roth IRA balance, you don’t have to. Traditional IRAs require distributions at age 70 1/2, meaning you could be forced to reduce the amount you leave to heirs thanks to mandatory distributions.

With about 27 years until we reach that 59 1/2 years-old threshold, my wife and I could save a large amount in our Roth IRAs, assuming we don’t tap contributions early to fund early retirement (something I mentioned as possibility in the last series post). Assuming a 6% average return on our $10,000 yearly investment, we would have nearly $700,000 in Roth IRA savings in 27 years.

Maximize 401(k) Contributions

In Adam’s recent post asking whether or not he should save for retirement or pay off debt, it seemed the consensus in the comments was Adam should contribute through his employer’s match, but use any remaining funds to reduce his debts. I agree; there is nothing like “free” money in the form of matching contributions.

However, there is a larger question here. After becoming debt free, should one continue to increase 401(k) contributions to the maximum yearly amount (currently $16,500), or should they invest that money elsewhere in a more diversified mix of asset classes (paid-for real estate, business ventures, etc.)? I don’t believe there is a right or wrong answer here. but it seems to me that if all you can afford to do is stretch to max out your 401(k), you may do better to spread that money around a bit. On the flip side, if you can afford to save above and beyond the yearly maximum, then you should first fund all tax-advantaged accounts, such as a 401(k).

What did we decide? After much deliberation, we decided to slash a few budget items and go after the max 401(k) contributions, recognizing we may not be able to do this every year going forward. Fortunately, we are now debt free, and through my blogging pursuits, we have what amounts to a second income. I recognize this does not work for everyone, and it certainly didn’t work for us until just recently. In fact, I haven’t even contributed to a 401(k) in the last few years while we whittled away debts and built emergency savings.

If we could find a way to continue maxing out 401(k) contributions until retirement age, we would have $1.1 million, assuming a 6% return. Add in Roth IRA contributions and growth, and we’re approaching $2 million. Of course, as I mentioned in my last post, this is not likely to happen because I want to move away from full-time employment in the next 12-15 years. If we kept up our goal of maxing 401(k) for just 15 years, we could still build a 401(k) nest egg of just over $400,000, and another $250,000 in Roth IRAs. Not bad at all.

Will We Receive a Return On Our Investment In Social Security?

In a word, no. I don’t believe we will. Put another way; don’t count on it. I personally believe social security as we know it today will not exist in another 15-20 years. It can’t, mathematically, as soon there will be many more people receiving benefits than paying in. That sort of upside down pyramid doesn’t work – just ask anyone associated with a failed Ponzi scheme.

Now, I am not as radically anti-social security as some. I just like the idea of controlling my own investment dollar, because I’m confident I can earn more than the U.S. government can. Enough of that, I’m not out to make a political statement. I am simply trying to reinforce the idea that people in their 20’s and 30’s should not expect to be able to live on social security in retirement.

If we do receive some form of payment from social security, just consider it a bonus, but certainly don’t count on it for financial survival. If the program is still solvent when I reach the age eligible to receive early payments, I’ll likely sign up. After all, nothing is guaranteed – neither my health or the continued viability of the program. Unfortunately, several people close to me paid in their whole lives and never received any benefits, or received very limited benefits through disability before dying young.

Alternative Investments for Retirement

In addition to the traditional types of investments I’ve listed here (and in earlier series posts), we are also interested in things like paid-for real estate. Specifically, we’d like to pay off our own home well before contemplating an early retirement. I have always thought living mortgage-debt free must be the ultimate in financial freedom.

Just imagine no credit card debt, no car payments, and no mortgage payments. Imagine the options available to someone in that position. Imagine the freedom they must feel with the only income requirement to earn enough to cover basic living expenses, and save for future ones. That’s it.

In addition to real estate, I will always have a side hustle or two going, and in the future may elect to invest more money to grow a current hustle, or develop a new one, without introducing too much risk into our lives. I started Frugal Dad over two years ago on less than $50, so it might be tough start something even more frugal!

In the final post in this series, we’ll look at one last topic: giving. Yes, part of our saving strategy is to give a lot away. I’ll share a few ideas I have on the subject, and as usual, try to put some specific numbers to our giving goals going forward.

Post by Frugal Dad

We’ll start by dumping discussion of a public health care option. After all, it’s clear that Americans are too freaked out about such a program. But to be consistent with the protesters’, analysts’ and policymakers’ demands, we should also:

Get rid of Medicare and Medicaid. These are big government programs that only benefit a few people. Such a socialist system only serves entrenched Americans who failed to plan for future medical costs. Sure, my mom will be without health insurance, but that’s just tough luck.

Shut down Social Security. Again, who does this help but a few hundred million people who failed to save enough for retirement? It’s not my fault, as an American taxpayer, that pensions and 401ks are under funded. By getting rid of the government-run program, business will jump right in to help current and former employees. I’ll be making a sacrifice here, too: We’ll force mom to sell her condo before she moves in with my unemployed sorry ass.

Get rid of public education. The system is a complete failure because we try to educate children we shouldn’t even bother with. Instead, let capitalists use supply and demand to determine who should get a quality education. I’m sure that business owners will provide high-quality education in poor neighborhoods even if parents can’t afford steep tuition rates.

Forget unemployment benefits. Why should only wage slaves get benefits? Why do so many small business owners, real estate agents, construction workers and freelancers get left out? It’s an unfair system and leads to Americans NOT looking for jobs. Sure, there is only 1 job for every 2,000 applicants, but if we get rid of unemployment benefits, Americans would CREATE the missing jobs.

Shut down the EPA. How dare a few policy makers decide if I can dam a river, kill off an endangered owl or spray DDT into my neighbors back yard? Such an agency is un-American.

Dismantle the FDA. I mean, come one, you know how I feel about this agency. It doesn’t work, so let’s just close it. Let the eater beware. If a few people die, stop buying that brand; eventually, the market place will take care of everything.

Ditto the CPSC. Why should the government give half a care whether toys are safe or an electric shaver has a tendency to electrocute its user?

Privatize the Military. Well gee, we all know how the Pentagon spent $34,560 for 54 toilet seats. I’m sure Blackwater will do a stand up job, and the tax savings will be enormous.

Fire everyone at the SEC. Who gave the U.S. government the right to regulate stock trading? It’s yet again another example of big government exercising power over markets just because it feels like it. Besides, unfettered capitalism would have prevented Bernie Madoff from turning to the dark side. In true Capitalism, Bernie wouldn’t feel the need to cheat investors to become a billionaire.

On the other hand, all financial industry bailouts should be left in place. Why? Look, how can politicians be expected to stay in power if their friends go broke? No, we need to keep the financial titans healthy and strong because they are a special case that cannot succeed on a level playing field.

You would think that is sooooo obvious.