Thoughts and Advice from FMF Readers

Much of the quality content here at FMF comes from the comments. There's a lot of wisdom, experience, and good advice on almost every post as readers with some great perspectives leave their thoughts. If you don't read the comments here at FMF, you're missing out!

Every once in a while I select a few that I want to be sure everyone sees for one reason or another -- they offer a helpful tip, raise an interesting point, or so forth. So today I'd like to share three recent comments with you. One is a GREAT tip (and something I'll apply) while two others hit upon things I've been thinking about/seeing in my life or the lives of others.

So let's get started. Here's a comment on my post titled Get Rid of Your Stuff: Make Money, Declutter Your Life, and Help Others. I had noted that every season we go through our closets and pick out the clothes we didn't wear. We then give those away or sell them at a church used clothing sale. Here's how one FMF reader takes this idea to another level:

One thing I learned years ago is that after you purge your closet of clothes you don't wear anymore, to then turn all your hangers around backward on the rod for the clothes you're keeping. After you wear an item, turn the hanger back around the right way. You'll be shocked how many hangers are still backwards at the end of a season - even after you did what you thought was a thorough purge of your clothes at the beginning of a season.

I LOVE this idea -- and we'll be implementing it for sure at our house.

The next comment came when I announced my March Money Madness winner, a post about how a blogger "broke the rules" and bought a new car. One reader responded:

Rules are made to be broken.

Personally I have been looking for a car for my teenage son and I am surprised at the cost of used cars. People and dealers want exorbitant prices which tilt in favor of buying [new]. Until the economy turns around and the demand for used drops I don't see this changing soon.

I am not willing to pay $12k for a 4 year old car with 80k mile on it when I can buy a brand new comparable car for $17k and zero miles on it. (I am talking Saturn Astra to the Chevy Sonic)

The $1250 in depreciation per year is worth the peace of mind over the 4 years, under warranty and you know how the car was driven.

This is exactly the same situation a friend of mine encountered. He wanted to buy his son a used Subaru Forester. But the best ones he could find were vehicles with over 50,000 miles and were only $3,000 less than a brand new one. So, he bought new. I would have too. (Then again, I buy new anyway.) :)

I think the car-buying "rules" are changing. While buying used may still be the better option in the majority of cases, it's no longer a "no brainer" in all of the cases -- and especially with particular models.

Is anyone else experiencing the same thing as you look to buy a new/used car?

Finally, here's a comment on my post The Key to Great Investment Returns that I've been grappling with myself:

I am an advocate of saving and shunning debt but I can't agree that the 401-k millionaires are the winners! Here's why, I recently worked with a friend of mine who retired early at 48; with a million in his 401-k. He had other savings outside his 401-k but not nearly enough to cover day to day expenses etc. So, he ended up dipping into his 401-k-taxed at normal rates with a penalty.

Upon reflection he wishes he had spent more efforts building a million dollar cash portfolio which threw off a lot of income. For those really serious about retiring in their 40's and 50's start thinking about what my friend came up against and maybe structure your portfolios differently.

Exactly. If you plan to retire early and yet have the majority (or even a decent portion) of your retirement savings in 401ks and IRAs, then you better have a GREAT plan on how to live off the non-tax-advantaged savings you do have. Otherwise, you're looking at some big penalties for early withdrawal. Yes, there are ways you can get at the money, but they constrain you at least a bit. Here's what CBS says about what I'd consider to be the best option for doing this (it's one that the majority of people are likely able to at least consider):

Substantially equal payments. If you want to turn your retirement money into an income stream before you're too old, you can do it with the help of what the IRS calls rule 72t. This allows you to dodge the penalty as long you take the money out in "substantially equal" payments over your remaining lifespan or that of you and a beneficiary.

There's even a loophole within this loophole. The payments don't' really have to stretch over your remaining lifespan. You've satisfied the IRS if the payments last five years or until age 59 ½, whichever comes later. After that you can take out as much or as little as you want.

There are a handful of ways your withdrawals can qualify as "substantially equal" in the eyes of the IRS, and they can get complicated. The web abounds with 72t calculators to help you sort things out, but you might want to double check the formula you settle on with a tax adviser.

So there are ways to get at your tax-advantaged money early, but they aren't really great.

I have roughly 60% of my retirement savings in either my current 401k or IRAs that were funded from 401ks at past jobs. So if I ever wanted to retire early, how would I manage doing it without some complicated (and likely expensive) moves (not to mention the lack of flexibility issues.) As a result, my retirement plan schedule by year lists what funds I have access to and what funds I don't in any given year. These numbers give me a really good feel for when I might be able to retire early.

Anyone else grappling with this issue (or have you worked around it)?

Comments

[Matt]

I am working on saving money outside my 401k and roth ira's. I would like a chunk outside tax deferred accounts along with inside tax defered accounts so I can have some flexibility all around. I have between 10 to 15 years to do this. Hopefully so I don't HAVE to take out of a tax defered but only take out what I NEED or want. We will see what happens.

Right now I would like to retire at 60 but that is years away.

[Money Beagle]

I do a similar type thing with hangers, but for a different reason. I typically wear a work shirt two or three times before washing it, unless there's an obvious stain or smell. After I iron it, I hang it on a wire hanger which means it's freshly washed and ironed. After I wear it once I put it on a plastic hanger. That way I can always tell whether it's been worn at least once. I'll have to maybe incorporate the backward trick, but I like to organize things by color or such regularly, so I think that would just get on my nerves :)

[K D]

We have a soon to be licensed (teenage) driver. I have been thinking the same thing about new vs. used vehicles. The used prices we have seen are crazy. It may be time to employ your car buying method.

[RichUncle EL]

All of these comments are great but the one that I took away the most from is the 401K advice, its really eye opening the way people do not consider or research the tax implications of withdrawing funds from a retirement account. This is why I am slowly building a dividend stock portfolio.

[retirebyforty]

I have rental properties and stock investment outside of my retirement accounts. These are throwing off passive income and will keep increasing. I'm leaving my day job before 40 and will probably need to do some part time work to cover the expense. I'm not planning to withdraw from the retirement account until I'm 65.
So my solution is rental properties, dividend stocks in after tax account, P2P lending, part time work, and spouse still working....

[ThomasC]

My wife and I bought a car just just over a year ago. We'd decided on a Honda Fit. Used Fits were only $4000 or so cheaper for cars with reasonable mileage. Because of this we decided to buy new. The reliability and included warranty were worth the extra money.

[soners]

Here's what I would consider for getting money out of 401ks. Rollover to a regular IRA. Retire. After you've retired and your income tax rate has dropped substantially, roll a year's worth of expenses into a roth (paying income tax as you do it). Wait five years and you can withdraw that contribution penalty free. Complete a roll over every year and your good. Now you have to have savings to live on the first five years--that could be a Roth you've already built up or a non-tax-advantaged account.

Also, aren't you thinking of working part time? My guess is that, given that you only live on a small portion of your current income, you'd manage to get pretty far with a part time income and would only need a small supplement.

[FMF]

soners --

Yes, I think I can probably earn enough part-time to cover all my living expenses. But I'm looking at the worst-case scenario, assuming I couldn't work.

We also have the option of my wife returning to work at some point.

[Jim]

The 'substantially equal periodic payments' 72t rule is one of the little known details about retirement accounts. A lot of people who'd like to retire early don't know you can do that and may be shuffling around their retirement unnecessarily and losing out on the tax benefits in the process.

[Rick Francis]

>Anyone else grappling with [available funds for early retirement]
I’m trying to plan for an early semi-retirement in the 55-60 range. I would like to work part time to earn just enough to cover expenses and let our retirement portfolio grow untouched. Our expenses should be much lower once our home is paid off and the kids are on their own.
I will have a LOT of Roth IRA contributions, and Roth 401K contributions that I could draw from without penalties. Ideally it wouldn’t be a problem even if I stopped working entirely as I have been putting a couple hundred/month into a regular investment account. In about 20 years that could be enough to fund a few years of expenses, especially if I bump up the savings rate once the mortgage is paid off.
-Rick Francis

[Lance@MoneyLife&More]

Right now I'm using a Roth IRA which should help. Also down the road I will start contributing to taxable accounts but right now it is just the Roth IRA and Roth 401k for me.

[Tie the Money Knot]

I too think that the rules of car buying are changing a bit, or at least bending a bit to fit the current economy and market for used cars. If the premium to buy new shrinks to marginal amounts, it just might be more than worth it for the peace of mind of getting a new car.

I say that being someone who bought his last car used, with less than 30k miles on it. That was a good deal then, but now I'm not so sure it would be as good of an opportunity.

[Melissa@LittleHouseInTheValley]

I have heard that the economy has created the demand for used cars. We prefer to buy new and just drive our car into the ground. Our car is currently eight years old and has 107,000 miles on it, but we are hoping to get a few more years out of it.