Mindy: The middle-class trap is defined as being a millionaire with all of your wealth trapped in your 401(k) or your home equity. But what if you could access your retirement funds early? Today’s guest is going to show us just exactly how he did that without penalties.
Mindy: Hello, hello, hello. My name is Mindy Jensen, and with me as always is my still has his retirement funds in his retirement accounts co-host, Scott Trench.
Scott: Well, with a setup like that, I’m going to withdraw from this podcast early, Mindy. BiggerPockets has the goal of creating one million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe that financial freedom is attainable for everyone, no matter when or where you’re starting, or whether all your wealth is in your 401(k).
Scott: Today, we’re going to talk about what the 72(t) rule is and substantially equal periodic payments and a lot of other jargon in the context of withdrawing money from retirement accounts. And we’re going to talk about an actual use case of this, which is so rare that we are, we have found in Eric here out of out in the wild. So Eric, thank you so much for hopping on today. We’re super excited to chat with you.
Eric: Yeah, glad to be here. Thank you so much for having me on on your show today.
Scott: Awesome. Well, let’s start things off by talking about substantially equal periodic payments and the 72(t) and how these terms, what they have to do with accessing the money in a 401(k) early, before traditional retirement age.
Eric: You know, I was really curious about how to access my money in retirement before I I reached the age of 59 and a half. As I got a little bit closer and closer to the early retirement that I was dreaming about, I Googled, how do I access that money early without penalty? And that’s when I found the 72(t) option that popped up. And I read about it, and learned about it.
Eric: And so that was always in the back of my mind. And I actually had a conversation with Fidelity as I planned my early retirement, and they they said that that was a good option for me and that they didn’t have any issues with me utilizing the 72(t). And what the 72(t) is, it’s a really powerful option for people who have well-funded retirement accounts and and do want to retire early because it allows penalty-free withdrawals from your IRA and your other tax-advantaged retirement accounts like your 401(k), 403(b)s. The IRS rule allows account holders to benefit from retirement savings before they reach that age of 59 and a half by allowing that early withdrawal without being subject to the normal 10% penalty.
Eric: So, it’s a really nice option, but it does have some strings attached to it and we’ll talk about that and and figure out how to best utilize a 72(t) and what that money might be be useful for.
Scott: Well, let’s describe it. What what is the rule? How does one use it and what are the conditions or gotchas, as I like to call them in the context of it?
Eric: Sure, there are some requirements and the requirements are a little bit, uh, some people might say they they tie you down a little bit too much. They don’t like, they they don’t offer a lot of flexibility. So, you must take the distribution for at least five years or until you reach the age of 59 and a half, whichever comes later. Also, the amount of the payment is calculated through three different IRS-approved methods. You have to think of it as like a small, a medium, and a large payout option. So keep in mind also that you will be taxed on the amount that you withdraw, and that varies depending on your current tax bracket.
Eric: So when I calculated my 72(t), I chose the option that provided the largest annual payout, and that is the amortization method. That amount is fixed annually, so every December now, I will receive a $20,000 distribution. So it comes magically from my IRA that was created by transferring $300,000 from my 401(k) to that IRA. Now, interestingly, this was done on December 29th of last year. So it’s not been that long. So the money in that IRA continues to be invested in index funds. It has already grown more than $60,000 since I took out that $20,000 distribution on December 29th.
Eric: The other calculation methods are known as the minimum distribution, that’s the lowest possible amount that can be withdrawn, and that’s based on life expectancy. And the third calculation method is called the annuitization method. It offers a fixed annual payout with the amount falling somewhere between the other two calculation options.
Eric: So, when calculating your 72(t), you’ll be given the option of using an interest rate that is not more than the greater of 5% or 120% of the federal mid-term rate, which is published in the IRS revenue rulings, and that’s for either of the two months initially preceding the month in which you get that first payment. So you can either use a 5% option when you decide what interest rate to use, or 120% of the federal mid-term rate that’s published in the IRS revenue rulings. So it does give you a little bit of flexibility in the amount that you’ll be able to take out based on those interest rates that you choose.
Scott: Okay. So, I’m let’s let’s put ourselves in the the, uh, let’s empathize with the folks that are driving their car right now listening to this or at the gym and who just totally got lost with all of those all everything you just said there. So let’s zoom out. I’ve got a 401(k). Right? Let’s say it’s got 500k in it. Right? That’s probably that type of person is probably a good candidate to begin considering this, right? I’m 40 years old and I want to access the money early.
Scott: There are three rules, small, medium, and large, that I can tap into in order to take that money out of the 401(k). When I take money out of the 401(k), um if I don’t use one of these three rules, I’m going to pay taxes on the payout. So if I withdraw 20k, I’m going to increase my ordinary income by $20,000 in that calendar year. And I’m also going to pay a 10% early withdrawal tax on that money. Now, if I use one of these three rules, I don’t pay the 10% penalty tax on early withdrawal for the 401(k), and that’s fundamentally why we’re going to talk about the 72(t) and these rules. Is that right, Eric?
Eric: Yes, that is absolutely correct. And you need to make sure that you do do the calculations correctly or you could be penalized by the IRS. So it’s definitely worth having your accountant verify your calculations if you’re not comfortable with your your own math there.
Eric: And one other thing that you need to keep in mind, Scott, is that if you do need to change that calculation, the only change permitted would be a one-time change and that’s from the fixed amortization method to the minimum distribution method. And that change again is available only one time, but that lets you drop it from, in my case, the maximum payout down to the minimum payout. So it gives you a little bit of flexibility, but you still have to take it for that period of five years or until you reach 59 and a half, whichever is greater.
Scott: So this is, this is an inflexible decision and requires very careful long-term planning to back into, right? And when we zoom way out at the strategy level, I will preface the entire discussion we’re about to have saying, I don’t love this as the plan. Like if I’m starting over from zero and I’m thinking about early retirement, I don’t love the plan of, let me stockpile a bunch of wealth in the 401(k) and then figure out a way to use it downstream. It can work in some instances, like you’re a high income earner and you know you’re locked in for 20 years. Let’s say you’re in a government job, for example, and the pension’s going to go in there and you’re going to stick it out the whole way through. Okay, then you can maybe make a case for a very long-term, clear-cut plan. But for most, you can avoid the rigidity of these rules by simply building more wealth outside of the retirement accounts over the, you know, a two-decade period and have more flexibility. Do you agree with that, Eric, just to preface a lot of the things we’re about to discuss in the context of using this?
Eric: Yeah, that would be brilliant, Scott. Unfortunately, I knew nothing about early retirement and the financial independence community. So I have been socking away $2.5 million into my 401(k), which was fantastic until I realized, wait a minute, I have all this money and I can’t use it.
Mindy: Stay tuned for more on how Eric pulled his retirement funds early with 72(t) after this quick break.
Mindy: Welcome back to the BiggerPockets Money podcast. Let’s jump right in.
Scott: And that’s perfect, right? This is not this is not a beating up Eric point. This is this is saying, we’re not saying, hey, design a strategy here, listener, where you’re going to put two and a half million dollars in your retirement account, not have much else outside of that, and then plan to use this to access it. That’s not a plan any of the three of us would recommend. However, we recognize the reality that many people are in that position because that’s where people automatically invested for many years. The market’s done a good a good run for the last 12, 15 years. And if you’ve been at this for a while, you could have a big pile of money in there and that’s what you have. And so how do we access it to fuel early retirement? That’s why we’re discussing this. Is that right?
Eric: Yes, absolutely. Again, for someone like me that’s got a well-funded 401(k) and didn’t realize that I was going to be retiring early, this is an amazing option for me specifically, other than doing Roth conversion ladders which takes several years. I can access this money now. I can spend it while I’m still young enough to enjoy it. Also, it’s going to reduce the required minimum distributions when I’m in my 70s. So it’s taking care of a little bit of that that future tax money that’s waiting for me, that big tax bomb that’s going to hit when I’m in my 70s. So this will lessen that a little bit. And I also, I I started a second 72(t) this week. So I will be taking two distributions each year now. So that, that is something I’m pretty excited about. And again, that’s going to take money straight from my retirement account. It will go into my, it’ll be sent to my to my checking account and will be a distribution that will come in the beginning of September.
Scott: Awesome. Well, with all that framing and context out of the way now, actually, one more piece of framing and context here. There’s a great article written by the Mad Fientist called How to Access Retirement Funds Early that I think is an excellent overview of the way to do this. And I highly encourage everyone listening to go out and read that. You just type into Google, how to access retirement funds early or you go to the Mad Fientist and check out that page. That’s a great way to frame the discussion about how to use this in a broader sense. Today, with Eric, we’re going to really zoom in on the 72(t) here and and how that’s going to work. So with all of that, Eric, I would love to hear a quick synopsis of your money story in terms of how it sets up to you needing to use the 72(t) here.
Eric: Oh boy. As I started my career, I was in a fortunate position that I didn’t have a lot of debt from school. I had scholarships, and I was working full-time and part-time. So I I felt like I left college in a good place financially.
Scott: And when was that?
Eric: That was, uh, 19, what, the last century, 1997-ish? Yeah. Um, so shortly after I I left college and returned to Louisville, Kentucky, I was working full-time as a broadcast journalist at WHAS radio and I bought my first property, which was a one-bedroom condo in almost downtown Louisville, just on the outskirts. I I paid a whopping $35,000 for it. So you can imagine how cheap my mortgage was. It was cheaper than anything I could rent. It was actually a really nice condo. And then I sold that a year later. My realtor came to me and said he had a buyer and would I be interested in selling it for $10,000 more than I bought it for? I said, absolutely. So I sold that condo and bought another condo in the same complex that was a two-bedroom for the amount that I sold my one-bedroom for. At that point, I got a roommate who was now paying my mortgage on my second condo there. And so I was living there and and now having this extra rent income, which was fantastic. So it was paying my mortgage. So about a year or two passes and I started looking at another property, another condo that was down the street. So I had my first rental property. My former roommate stayed there. I moved into my new place and I got a roommate at my new place. It was much larger, very nice, plenty of room for two people. So I had rental income plus a roommate plus my full-time job. And what I did that was really smart, I got home equity line of credit. And they gave me a very generous home equity line of credit and I was able to use that as the down payment on my next property that I was purchasing. Actually, I believe I I used that to purchase the whole property. It was that that generous of a equity line of credit. So I purchased the condo that was above mine using my equity line of credit and I got tenants in there. So that was my second rental property. And then a couple of years later, I was able to purchase the unit below using that same equity line of credit that I had since paid off. And then I moved into a condo down the street from where those are and I rented out my old condo and now I live just down the street from all of my rental properties.
Scott: So, so over the period of a couple of years, you buy a bunch of rental properties. How, how do you amass so much money in the in the 401(k)? Can you kind of zoom out and give us that picture at the highest level? Like how did, how did you come to have millions of dollars in the 401(k) over 20 years?
Eric: So, I’ve always lived well below my means. I I’ve always been a good boy, so to speak, financially, done the things that I’m supposed to do for the most part. I’ve made some mistakes, obviously, but um, I I started contributing early when I received my first full-time job. My news director at the radio station I worked for, his name was Brian Rublin, one of the nicest guys I’ve ever worked for. He had these glasses and he would move his down on his nose and he would look at me through them and he would say, now, this is important. You need to put this into your four, you need to start your 401(k) and contribute to it as much as possible. This is, this is really important for retirement. And so I, that was really the first piece of financial advice I had ever been given. And I listened to him and I did it. And I maxed out my 401(k) as soon as I could, which was a couple of years later after I left that job because broadcast journalism doesn’t pay anything. I don’t know if you guys know that, but it’s not very lucrative. So I moved into corporate communications and that was a much more generous retirement program. The benefits were great. And that’s when I was able to start maxing out my 401(k) by keeping my standard of living unchanged and using that extra income to just push into that 401(k). And at that time, a 401(k) Roth was not an option. A Roth 401(k). So it was all money going straight into 401(k). And it wasn’t until probably four or five years before the end of my career that they offered that Roth option. And trust me, I wish it would have been earlier, but unfortunately it wasn’t. I do have some money in Roth, but you know, at that point, the tax savings because my income was much more substantial at that point, so my tax savings by doing the Roth just it wasn’t there.
Scott: So over 20 years, could you give us an idea of the magnitude of what you’re able to accumulate inside the 401(k) and its relative position to the other assets you had outside of it?
Eric: Sure. So it was a slow growth, but slow and steady wins the race. And I started out mainly in mutual funds and then I started getting a little bit more aggressive. I had the option to to do regular stock trades in my 401(k). So I bought tech stocks and I was very lucky in being able to buy some Apple and Facebook and some of the newer stocks that started popping up as they came along. None were huge winners, winners right off the bat, but they were heavy growers over the course of time. Um, and I have since changed my strategy and now I’m, I’m pretty much in index funds or the majority in index funds. I do still have some individual stocks, but I’m trying to move in that direction because that’s the smart thing to do and I’ve learned my lesson. But that was, uh, over the years, it accumulated to 2.5 million before I I retired in my 401(k).
Scott: And when did you retire?
Eric: So in October 2021, I saw a Facebook ad for the EconoMe Conference in Cincinnati and it seemed like a really great idea to go to this conference, meet people that are going through this and are excited about early retirement because I didn’t know anybody that was. And the conference was so great that I came home and I wrote up my resignation letter at the age of 47. And my last day of work was January 3rd of 2022. So it’s almost been three years since I’ve retired and it has been an absolutely amazing journey. I don’t miss work, I don’t regret my decision to retire. And and I haven’t been bored at all. I I feel like this is absolutely where I need to be at this point.
Mindy: I love it. Okay, so you mentioned a couple of types of accounts, but I want to kind of dive into where your money is right now. You mentioned the 401(k) and you mentioned that you moved 300,000 into a traditional IRA. Do you have money in any other buckets like an after-tax brokerage or a Roth IRA or anything like that?
Eric: Yes, I do have money in different buckets. I’ve got money in a regular Roth. I’ve got my also the contributions that I made to my Roth 401(k), which I can also tap into. I do have just a regular brokerage account that I can tap into. I haven’t utilized money in either of those accounts at this point. And I think I will at some point, but I’m not there yet. I I’m enjoying doing these 72(t)s and trying to take the that income that’s in my my 401(k) down just a little bit and spend some of that while I’m young. That’s kind of my game plan right now.
Mindy: Yeah, okay, I wanted to set the stage so that people could understand where the money is coming from. But the bulk of your wealth is in your 401(k). So I would you say that is true?
Eric: Yes, absolutely. The bulk of my wealth is in my 401(k). My living expenses are paid by my my real estate, my income from being a landlord. And then the 72(t) money that I receive is is going to be, it’s been 20,000 for the last year and I’m bumping that up to 30,000 with another distribution that will be coming in September. And so for until I’m 59 and a half, I will receive that $30,000 distribution annually. And I’m using that as a fun bucket. So that money is is specific for me to enjoy retirement. It’s money that I otherwise wouldn’t be spending. It’s money that isn’t necessary for me to have on hand, but it sure makes travel a lot easier. It makes going out to taking your friends to dinner when they come visit easier. It it’s it’s makes dating somebody that has three children easier. So it’s just a lot of extra cash that that you can make things happen with that otherwise you might not be able to do.
Mindy: Mindy, one of the ways that you framed this in the past with other guests has been there’s just there’s just too much money in that 401(k) at the age of 47, right? Now you take like the, you know, if you take the, you know, 18 years between 65, traditional retirement age, and 47, right? And you say, okay, there’s the rule of 72 where your money roughly doubles every seven years, for example, I mean, there’s going to be well north of 10, if not approaching 15 million dollars in that account. You can bump that down slightly for inflation um to there. But there’s still an enormous pile of wealth that’s sitting there in the 401(k) and how useful is that wealth at 65 relative to 47? So that that’s the problem that Eric and a lot of Americans, frankly, have, I think at this at this point. and that’s why we’re discussing this. You don’t want to start with and then you have to withdraw it, right, starting around uh what what age do you have to start You have to start withdrawing it, Eric and Mindy? You you guys know?
Eric: It is changing. Yeah, it’s, I believe they’ve changed this to 73 and it will be 75 by the time we’re at that age. So it’s going to be a slow roll progressive roll to 75.
Scott: So, but if you don’t if you don’t use it at that point, um, and it continues to grow, you’re withdrawing a huge chunk of money and paying a lot of taxes at that point as well. So, I think it’s a very rational decision to to go and tap into it. Can you walk us through the mechanics of why you chose the amount you did and the accounts you did in terms of um, beginning the process of withdrawing some of that money.
Eric: So I’d like to talk a little bit about the psychology as well because, um, you know, when I started talking about early retirement, that’s when COVID hit and I was working remotely from the comfort of my couch, which like so many people were and and really enjoyed it. Um, and that was a good test bed for me to decide whether or not I liked being at home this much and whether or not early retirement was something I might enjoy. And in fact, I did enjoy it and it made me want to go ahead and and pull the trigger on that. So, I had been using the 72(t) in the back of my mind as an option to tap into. I didn’t know when I wanted that option, but I knew it was there and I knew it was part of my plan overall. So after talking with Fidelity, I decided that I didn’t want to tap into that money immediately. So for the first two years of my retirement, I lived off my rental income and it was comfortable. I was traveling, I was doing all the things that I wanted to do and I was having a great time. And then I decided now is the time that I want to explore looking into that 72(t). And what really made me look into it a little bit more is my annual call with Fidelity. And the, uh, vice president of Louisville’s Fidelity division was trying to sell me an annuity for $300,000 and he said he’d give me a payout of $20,000 annually if I bought that annuity. And I really had no interest in that annuity, but I liked the idea of getting that $20,000 a year. So I asked him why not do a 72(t)? And he couldn’t give me a good answer other than I know he was not going to receive a commission based on the sale of that very large annuity. So at that point, I went ahead and started the paperwork and my 72(t) was established at the end of December and that money has been has been great. It’s it’s provided me a lot of travel over the last eight months and it still has a little bit of power left in it, so to speak. And then I’ve got my second 72(t) paperwork right here that I’m filling out and I will send that into Fidelity this week and hopes of having that payment in September.
Mindy: How much has left from the original 20 that you took out at the end of last year?
Eric: Well, Mindy, that 20,000 came out and it dropped it down to $280,000, but it has since increased by 60,000. So it’s at about 342,000, I think last I looked at it. So it has substantially climbed and that has made me definitely want to do another 72(t). And that’s all in the index funds. Yeah, it’s all invested in index funds.
Mindy: And of that original $20,000, how much do you have left after spending for eight months?
Eric: Uh, probably about 7,000, roughly.
Mindy: Okay. And I like that this is your fun bucket. This is not you’re not living off of it. You are like, splurging off of this. But also, you have rental properties and that’s what’s funding your current lifestyle. Do you plan to keep those rental properties or do you plan to sell them in the future?
Eric: So that’s the million dollar question I’m dealing with right now is what does the future look like with my real estate? Um, as much as it’s so fun to be a landlord and to deal with broken toilets and HVAC systems that die in the middle of summer and winter and floods and broken pipes, um, you know, I do kind of want to, I do kind of want out in the near term. And I’m looking at the options of that and trying to figure out what’s the best way to make that transition. And I I’ve got some friends in the local FI groups here in Louisville that are interested in my properties and so we’re trying to look at options, whether that would be me financing it as the owner or me just making the properties available to them and they purchase it in a traditional sense. So I I would like to talk more to an accountant that might have some of those answers because I don’t want to lose, right now I’m maximizing my subsidies on ACA. So, I don’t want to lose those subsidies, but if I have to for a year, I’ll survive. It’ll be okay.
Scott: Walk us through that point.
Eric: So ACA subsidies, as as most people that are are early retirees know, um depend upon your your income. As you apply for ACA subsidies, they look at your AGI, your adjusted gross income. And for that reason, I don’t want to show too much income. And by selling those properties, those rental properties, that would be that would be income. So I don’t want to lose my my health care for my subsidies for the year, but if I have to, I I will. So that’s kind of where I am. I’m trying to weigh the benefits, uh, what would be the best options tax-wise, also capital gains and a depreciation recapture. I have to look at those as well. So it really is a big math problem that I don’t have the answer to yet.
Scott: And a 1031 does not solve that?
Eric: 1031 kind of pushes it down the road a bit, but potentially it could. That’s that’s something else that I’ve I’ve talked about. In fact, Mindy and I’ve talked offline about that a little bit.
Scott: Okay, let me ask you this. Can can and you you tell if you don’t want to answer it. What was your AGI last year?
Eric: Uh, I believe it was $26,000. Yeah. I looked at it the other day as I had to look at some paperwork for my health care. They they shut me off of the ACA subsidies due to a missing document. So I had to go find my documents and resubmit them, even though I had already submitted them, but it was right at 26,000.
Scott: So that, think about what what Eric just said here. Eric withdraw, withdrew, withdrawal, withdrew $20,000 from his 401(k) in 2023, which is taxable income that hits his account. And from everything else, all this real estate which we can imagine did very well, just hearing a fraction of this, from the story here, generated $6,000 additional dollars to add on top of that $26,000. That puts you in what tax bracket, Eric?
Eric: I think 10 to 12% somewhere in there. It’s pretty low.
Scott: Okay. And what what did you actually generate from a cash flow perspective to spend in your lifestyle?
Eric: Uh, so my rental properties bring in $5,400 a month. So that’s at 65,000 a year. Uh, so then you would add to that the 20,000, which would be 85,000 a year, and then the additional $10,000 that I will be doing with my next 72(t). So it’ll be at about 95,000 is what I’ll be withdrawing or or earning.
Scott: That’s, so think about think about how sophisticated and smart your your setup is here. This is incredible wealth management from my view, right? Like you have a a very substantial net worth. It’s all housed extremely tax efficiently. You are generating highly tax advantaged income on the real estate front, which you are admitting is a pain in the rear and you would like to to reshuffle to a little bit here. And but but and you’re able to generate, you’re able to start withdrawing from your 401(k) without any tax implication, without any tax penalties, but and at a 10 or 12% tax bracket, which also gives you advantages like being able to access the Affordable Care Act and great rates there. I mean, it’s just it’s just an incredible outcome here from a planning perspective from my view. So, congratulations on that. Um, that’s that’s that’s that’s remarkable.
Eric: Well, thank you. I appreciate that Scott. I’d love to say that I just know all this and I’ve known it forever, but honestly, I didn’t even know about early retirement until 2019 and and it has been a long and quick learning process at the same time. There’s so much to learn and to ramp up that quickly and to learn all of this valuable information and to make it stick in my mind. It’s been a bit of a challenge, but it’s been a lot of fun, too. And there’ve been great podcasts that have helped along the way and friends like Mindy who who are there with all the answers and all the people I need to talk to if if something pops up.
Scott: Yeah, you paid like two grand, 2,500 in federal income taxes last year and you generated 95k in spending money from this portfolio, right? That’s that’s unbelievable. And and uh, that would be that’s like generating $140,000 annualized income, 130 perhaps there.
Mindy: We have to take one final break, but more from Eric and his financial journey right after this.
Scott: Welcome back to the show.
Mindy: I want to know is how this 72(t) is affected by selling your real estate because right now, like Scott just said, you have like 65,000 in rental income that’s funding your lifestyle. When that goes away, let’s say you sell them all next year. When that goes away, would you just live off of the money you get from selling the houses or would you do more 72(t)s?
Eric: Well, the 72(t) doesn’t go away. So again, that is with me until I turn 59 and a half. So every year I’m going to be taking this $30,000 distribution whether I want to or not. It has to happen or I pay the penalties and all of the interest back on all the money that has not been paid out. So yeah, I’m stuck with the 72(t) and I’m okay with that. And then if I decide to sell my rental properties, then I will pocket that money. I’ll pay all my taxes, I’ll pay my capital gains, I will pay my depreciation recapture, and then I will put the rest in a brokerage account and and invest it and continue living off that. The other option that I’m looking at, and this might be the better option for me, is to sell my primary residence, which you don’t take capital gains on for the first 250,000. So if I sell my primary residence, I can pocket that 250,000, does not count against my ACA subsidies because it’s not looked at as income. So that gives me a stack of $250,000 in hand. Then I could move back into one of my rental properties where I used to live and live there for a couple of years if I wanted to and it’s kind of negated the need for that rental income because I’ve gotten rid of my mortgage payment, which I’m paying right now. So it’s a, it’s an even win and I get that 250,000 in hand without paying any any capital gains.
Scott: Eric, I can say that I’m doing a lot more to combat the federal deficit than you are this year.
Mindy: Well, wait until I turn 75. Then I’ll be doing my fair share, I promise.
Scott: I wanna, zooming out here, you know, what if we’re assessing your situation, kind of appraisingly from the highest level, right? We’ve got a net worth probably well past 3 million dollars, but most of it again is in the 401(k) area. And you chose to really just really, in a relative sense, dip your toe in to withdrawing from the 401(k). $20,000 per year on a portfolio of two and a half million dollars is .75% of the portfolio value on an annualized basis. You literally generate more in dividends per year from a stock market index fund than the amount that you are withdrawing. Let’s, let’s kind of take this to the next level and say, like, you know, how do, how would we think about helping someone who had half of that amount in their 401(k), right? It’s it’s almost not really a big decision for you to do that. I know it’s a psychology a big decision, but now that we have zoomed out and kind of framed it like that, it doesn’t seem like that big a decision. Do you think that maybe going to the level of the dividends that are being paid out by a stock market index fund would be a good rule of thumb? Or how, how would you frame it to somebody else who is, you know, thinking about replicating your situation but didn’t quite have two and a half million bucks in there.
Eric: You know, I think the, the 4% rule has has proven to be very safe and I feel like that for me is just way more money than I need right now. It also would increase my, uh, decrease my ACA subsidies. So I could see that somebody that might have $500,000 in their account and want to to access that and still have some additional other revenue available to them, I could see that that would be a way for them to tap into that, to do a 72(t). Um, and there is a really great calculator that I would recommend. If you go to the myfloridaretirement website, that’s myfrs, myfloridaretirement, um, they have a 72(t) calculator that kind of gives you all of the information you need. You just plug in the amount that you want to put into that retirement and see what comes out of the 72(t). So if you want to create a 72(t), you put the amount that you have available and you can play around with that and it will tell you what the payout will be. So if you’re aiming to get $10,000 to to to live on off that 72(t), it’ll let you plug in the different uh, interest rates. It’ll let you plug in how much you have in your 401(k) and then it will spit out the answer, which might be this will be $10,000 or $20,000 or however much, you know, you would like to take out. But I do think it’s a great option to look at. You may find that for you, the the, the Roth conversion ladder may be easier or more ideal. But for me, it just it, that was not something I wanted to do.
Scott: My mind is spinning on all this stuff because this like like it feels like this is a puzzle piece that I haven’t really thought through enough for the middle-class trap concept, right? And the advantage that I had not really considered from this concept is the ACA benefits. So this actually feels really tied into the strategy of using the the 401(k) to to withdraw money for many people who are potentially listening to BiggerPockets Money. Can you walk me through what the consequence, like what your ACA premiums are today and what they would be if your income was higher?
Eric: I can absolutely walk you through that because, um, I just got a letter in the mail last week that said my ACA monthly subsidy had gone away because I did not send a document that they requested, which I did. I sent the document, they didn’t get it, blah, blah, blah. Anyway, so my my monthly my monthly contribution toward my insurance was zero and it went up to $525 a month when I lost the subsidy. So it’s a big difference and I want to get that subsidy back. So as you can imagine, I was on the phone that day working with them to get that document in place and to return my subsidy to where it belongs.
Scott: And that’s for just you, right?
Eric: That’s just for me, $525 for a high deductible plan, yeah. Sucks being old.
Scott: But here here’s the thing, this is really tied in here, right? People who have a huge 401(k) are likely to be past 40, right? This is like if, if you’re 30 and have 2 million dollars in your 401(k), please contact us. We want how the heck that happened uh uh here. You know, around us. Like it’s just not it’s just not realistic. You need time and good returns to get to that point. So, but you know, who who is likely to be in this position? Well, it’s likely to be it it could be someone potentially with a family, for example, and that is a major problem in retirement planning. Um, if you’re not able to get, like that that subsidy could easily be a thousand or 1,500 for a family of four in there, which really is a huge barrier to to early retirement here. And it sounds like keeping your income below a certain level is absolutely critical to getting help with that.
Eric: I will say that I did do the calculations for my retirement and I included paying my own health care. I was factoring in $700 a month to pay for my own health care. Fortunately, ACA subsidies were available, so I quickly made that line go away and allowed myself to enjoy those subsidies. So, at some point when I sell my properties, um, you know, that’s going to come back into play and I’ll have to pay that for at least a year, but I think it’ll be well worth it.
Mindy: Yeah, I mean, it’s a great problem to have all this money so that I don’t qualify for the ACA. But when you don’t qualify for the subsidies, it feels like highway robbery. So I’m right there with you.
Scott: That’s a lot. Um, okay, well look, this has been phenomenal here. Uh, I think the strategy is super clear and again, we just don’t see a lot of examples of folks using the 72(t) or at least I haven’t come across quite as many in the time we’ve been doing BiggerPockets Money. So, really interesting to hear that and how it fits in with the other components of your strategy, including real estate and the way the way you manage your AGI here. Are there any other items you want to share with us on this topic before we adjourn here?
Eric: You know, I I was asked what advice I would give to somebody that’s starting out on their financial journey. And if you’re young, I feel like it’s so important to to find your support. Find the people that are investing in you and let them guide you. You know, it’s so important to to also give yourself some grace and to find what fits for you in that FI journey, whether that means you’re going to allow yourself to eat out a couple of times a week or you’re going to eat ramen. Um, try and figure out what feels comfortable for you. Um, and again, I want to talk about community and how important community is as you begin this journey. Even for me at the very, you know, stepping into to the FI community at the very end of of my career, I have met so many amazing people and it has made my retirement well beyond what I ever would have imagined that it would have been. I have now people to travel with that I wouldn’t have otherwise met just by going to EconoMe and CampFI and and attending events and being engaged. Uh, you meet so many people that share so much information and they they genuinely do care and they are offering their their insights and, you know, it’s it’s a great tribe and make sure you you meet those people that are willing to take you under your wing, under their wing and and give you some recommendations and guidance along your journey. Um, I think that’s that’s really important information and to the people who who tell you that you can’t reach FI, it doesn’t, it’s not real. It is real. I’ve done it. It’s, I’m almost three years into this experiment. My money is continuing to grow. Uh, the sky hasn’t fallen. I kept waiting initially for something bad to happen, especially the the months leading into my retirement. And nothing happened. It was great. And it took that two-year period to just kind of let my shoulders down and and say, I’m going to be okay. It’s all good, but I’m here and it’s it’s been great.
Mindy: All right, Eric, this was so much fun. I have been wanting to get you on the show for such a long time. I’m glad we finally were able to make it happen. I think that the 72(t) is such a great solution for people in your situation. You do have other buckets, but there’s also, like Scott said, we had that that guest a few months ago who is locked in the the middle-class trap, having enough money to retire, but it’s all in these retirement accounts that you will incur penalties for when you withdraw. I don’t want to pay a 10% penalty to the government. I’ll pay my taxes. I I appreciate having roads and police and fire and all the things that, you know, taxes provide. But I don’t want to pay a penalty. That’s my money and I want it now. Anybody know J.G. Wentworth? Anybody old enough for that? No? Okay. Never mind. Um, but, uh, I’m going to get a lot of comments from people who are like, I remember that commercial. Anyway, um, this is a great solution for people in that scenario where you’re still paying taxes. You’re always going to have to pay taxes on your 401(k). You’re not going to get out of that, no matter what age you start pulling it out. But you’re getting around the penalty and you’re being able to to access those funds early. So, I just, I love it and thank you so much for sharing your story with us. I really appreciate it, Eric.
Mindy: All right. Eric, thank you so much. Is there any place people can find you online?
Eric: Facebook.
Mindy: Fantastic. Go look up Eric Cooper on Facebook.
Scott: Uh Eric, thank you so much for coming on BiggerPockets Money today. Learned a lot from you and thanks for showing us a great example of this powerful tool.
Eric: My pleasure. Hopefully I can help somebody along the way.
Mindy: I bet you can. All right, thanks, Eric. We will talk to you soon.
Scott: All right, that was Eric Cooper and that was a lot of information about the 72(t), which if you are stuck in the middle class trap, you could use to access your retirement funds early without penalty.
Mindy: That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, take a bow Highland Cow.
Mindy: BiggerPockets Money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Knutson, copywriting by Calico Content. Post production by Exodus Media and Chris Makin. Thanks for listening.
