Not to burst your bubble, and I’m aware that I’m joining the conversation fairly late, but it appears that you’re ignoring several major issues:
1) At the ripe old age of 49, you’re replacing your (then current) salary of about $140k with about $50k from your $1 million in muni bonds. Whoops?
2) It is tempting to use high numbers for the rate of return. You reference a document that gives an average rate of return for a period that is significantly longer than the time period you end up using. As a result, you ignore the larger fluctuations that occur during your period. The Social Security Advisory Board suggests (http://www.ssab.gov/Publications/Financing/estimated%20rate%20of%20return.pdf) using a 7% rate of return for stocks, and 3% for bonds, rather than your 11% and 5%, respectively. Of course, that 3% reduces the money you earn on your $1M from $50k to $30k…
3) You’ve ignored inflation. If you assume 2.5% annual inflation, which is a little low, historically speaking, your $50k is really only worth about $27k in today’s money. Now, supposedly you could be living on that much, given that you’re starting out by living on about $23k, except that, by age 49, you’re living on about $76k (or $41k in today’s money), after subtracting the retirement money and the extra 5%. Of course, given actual muni returns, it’s quite a bit less.
4) You know that your investment (“non-tax sheltered acount”) will be taxed, right? At the least, I’d expect that you’d have some dividends that would be taxed; you’d more probably be buying and selling stocks (or your mutual fund manager would do it for you), subjecting yourself to taxes on short- or long-term gains. You’d be better to chop 15-20% off your expected gains in your investment account.
5) You suggest that you are willing to give up some cheddar in your later years for a little more freedom now. Assume that taxes on the traditional 401(k) are only 20%. Your friend will have $150k more _per year_ at age 60 than you will, assuming that you both spend only 4% of your retirement account per year. That’s $60k per year, inflation adjusted; she’d make 150% more than you make now, every year from age 60 on.
6) Finally, although you’ll have had 8 or 9 more years of retirement, you’ll have spent them eating ramen noodles and watching cable, not sitting on the beach and drinking mai tais, given the paucity of money you’ll garner from the million dollars (again, thank inflation). Your friend, on the other hand, will have continued her increased earning power, owing to those nice 5% raises you’ve given her, and will have earned $880k outside of the retirement and investment savings. She could take a few nice vacations on the $425k she earned more than you over those 9 years.

It will force me to look at my own plan closer, since right now, I’m concerntrated almost entirely on the Roth side of the equation.

Personally, I never plan to fully “retire.” If retirement means that I stop earning and investing money. I currently run several part-time businesses, and I’m sure I’ll have some in retirement as well, since I find it fun and enjoyable to run them. As such, I’m assuming I’ll be in the top bracket in my golden years, and I don’t want to be taxed significantly.

But that said, if I am able to generate a substantial amount of income in my retirement years from rental properties, part-time businesses, and other investments, then I may not ever touch my retirement accounts. So it may be a moot point anyway.

Nice to know this option exists. I’ve learned something new with every comment.

Good luck!

JK

I appreciate the dialogue – to have dissenting opinions on finance topics was one of my goals when I started this site.

Your first point of debate is based on an incorrect understanding of what a traditional 401K is. The misinformation is that you believe gains on a 401K are taxed annually. This is simply not the case. Traditional 401K’s are tax sheltered accounts and are only taxed only upon distribution, withdrawal, or conversions to a Roth IRA. Also, I fully acknowledge that you would have more cash at retirement going with the Roth, but that is not my goal. My goal is to retire early, and I’m willing to sacrifice the extra money in my later years for that privilege.

In response to your second point, you can certainly retire early and access your cash, however, you cannot do this without penalty, so I would not recommend it to anyone. There is a 10% early withdrawal penalty in addition to regular income tax, as is visible under #1 of the link you provided. Essentially, you might as well put the money into a non retirement account so that you avoid the penalty.

As to flipping real estate, I’m glad you were able to make a profit, consider yourself very lucky. There are a lot of people out there who have lost a whole lot of money trying to flip properties. I think there needs to be a balance between retirement and non-retirement investment strategies in anyone’s portfolio. Flipping real estate is one way to do it, but it wouldn’t be my recommendation in this market.

Another problem is with the starting point of the argument. He states that you can’t retire until your non-qualified money reaches $1 million. Not true. You can retire at age 20 and take distributions from your Roth/Traditional 401k at any age by taking a 72t distribution. More on that here: http://www.irs.gov/retirement/article/0,,id=103045,00.html

If you want a good calculator, see this one to compare Roth v. Traditional 401k: http://www.bloomberg.com/invest/calculators/roth_tra.html

This is my opinion, based on what I think I know. Note: all of MY assumptions may not be correct, just as I believe some of Mr. Miller’s are flawed.

But you have it figured out in your head, Michael. You say in your previous post that GE will pay more taxes. If they both make and invest about the same, and one pays more taxes, who will win?

To take the access to cash argument further, why invest any money in a 401k, Roth or Trad? Why not put it all in investments that allow you to have ready access to it without penalty or oversight by the IRS? Something to consider… I have started putting just the matched amount in my retirement plan, which I’m still not convinced is my best bet.

I am relatively new to the workforce, and the first year I was eligible, I maxed out my Roth 401k. I have since taken a new job that only offers a SIMPLE, but I am convinced that there are better places to put my money. I have started investing in real estate. I am working on flipping a repo right now. My out of pocket will be about 10-15K, and I already have an offer that will put my profit around 20K, giving me a return of 133-200 percent, in less than 4 months! Can your 401k do that???

Keep up the good discussion!

JK

If your ultimate goal is having as much $ as possible at the moment of your death then there are better strategies out there. If you’d prefer to have access to your $ for more than the last few years of your life, G.E.’s approach makes a lot of sense. Do you disagree?

-Michael