457b

Yeah, I’m one of the lucky ones. And just like before with my pension, I’m thinking about punching that gift horse straight in the mouth.

A key part to reaching FI in under ten years was maxing out my tax deferred investments every year. Thanks MadFIentist !! Of course the main disadvantage to this is you can’t get your money out most types of tax deferred things like 401k’s and traditional IRAs until you’re 59.5. Try and get it out before then and you get a ten percent penalty. There are some ways around this, but nothing’s perfect. But yay for me, like many other public safety employees, instead of a 401K, I was chucking money into a 457b.

The 457b is pretty sweet. You get the tax deferred benefits, but you can take the money out without that ten percent penalty. Guess they did this because a lot of cops and firefighters retire before 59.5, and are too physically broken to find another job. Some 457 managers restrict the amount of times you can make withdrawals, limiting it to only once after you leave your employer, but once again I’m super lucky. I can make as many as I want.

But then there’s the but.

But….my account manager charges .40 on top of every fund they offer. So that kinda sucks. As I just left my employer, I had a decision to make. Keep almost half of my money in the 457, where I can withdrawal at anytime without penalty, or roll it over to somewhere that doesn’t take almost half a percent. But then I get the penalty if I do take it out before 59.5, so…..time to do math I guess.

First off, how much is that .40 costing me. Thanks be to the internet, done found out right quick.

Breaking it down:

-Right now I’ve got about $285,000 in my 457.

-I can either keep my money in the 457, or roll it into an IRA.

-Fund options and their associated fees in my 457 are similar to what I’d be getting If I’d roll over into a vanguard IRA. (some sort of total stock market fund)

-It’d be almost exactly 20 years until I could draw from an IRA without penalty, so that’s my holding period

-and, as previously mentioned, I’d be paying .40 in fees to be able take my moneys out whenever I wanted.

The only thing left to plug in is what I think my rate of return will be for the next 20 years. I have no idea what that will be(duh), so I went high and low. Best and worse case. Some people smarter than me think it’ll be low for at least the next decade, around 3%. At that rate the extra fees over 20 years would cost me about $30K, with a portfolio valued at around $475K after two decades. On the other end of the spectrum, if we go full Dave Ramsey, but account for inflation and estimate an absolute best case return of 9%, those fees would cost me about $60K, with a portfolio worth $1.4 million in 20 years. Split the diff, then err on a tad lower with a 5% return, fees cost me $37K, with a portfolio valued at just under $700K.

More math to think on. Markets go up and down, but right about now I have about $745K total in my investments, subtract out the $285K in my 457, and I’ve got $460K I can get at without a 10% penalty if I rollover into an IRA. If we don’t assume any of that is going to grow for the next few decades and straight divide $460,000 by 20 years, I could pull out $23K a year before I’ve completely depleted everything not in my imaginary IRA. My most up to date average expenses since having kids shows I spend about $27K a year.

Ah! 27 is larger than 23! I’d be short $4k a year!!! I better keep my money in that 457 and eat those fees in case I need the money.

Or not? After all, the above assumes I never make any money for the next two decades, and my investments don’t grow at all. It also doesn’t factor in the VA, which is currently paying me $17K a year. Even if they cut my benefits by over two-thirds, I’d still be getting $5.5K tax free, which would easily close the gap to that $27k average annual spend.

Then again, just like I can’t predict what the market is going to do for the next 20 years, I have no idea what I’ll end up spending. Sure, daycare costs will go away in a couple years. Maybe all spending will go down. Or maybe more shit will happen, and I’ll end up paying out God knows what for whatever crazy emergency befalls me or my family.

What I come back to is if I things go to shit, that $30K in fees will be worth it. If the market is stellar and my 457 grows to $1.4 million, I’m not going to care about the $60K in fees that give me the option to pull from it over the next 20 years penalty free.

Right now, I’m going to keep the 457. I can always roll it over down the line. Who knows, maybe in 10 years our net worth will have grown so much that we can’t imagine the edge case where we need to tap that tax deferred account before I’m 59. And maybe we’ll want to get cracking on that whole Roth conversion ladder to avoid RMDs, so it’ll make sense to roll that sucker into an IRA.

For now, I do nothing.

Writing this has been an interesting experience. When I first thought about this, my frugal bordering on cheap nature scoffed at paying that .40 expense, and I was pretty sure I was going to roll my 457 into an IRA ASAP. But going through the above exercise, looking at the numbers, and then factoring in the qualitative aspects had me rethink the whole thing.

Glad I did.

What about you? Would you keep the 457 or rollover if you were in my shoes, and why? Have you faced a similar situation; what’d you do?