Motorhome Retirement: Withdraw 401(k) Early Without Penalty

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Includes: BPL
by: GrayBeard Retirement
Summary

Discuss final accumulation and distribution plans for early retirement.

How to draw the 401(k) early without penalty.

A look at the high yield portfolio.

Discuss why one of the holdings is soon to be sold.

In my last article, I painted some really broad brushes of our plan to retire in 2020 into our Motorhome Retirement. Now I want to pull back the curtain and dig a little deeper into the final stages of accumulation and the income model for the first few years of retirement. The high yield portfolio is introduced along with a review of one of the holdings and why I will be selling it.

Final preparations and first few years of the Motorhome Retirement

A quick summary. We plan to retire in July 2020 and roam the country in our motorhome for a few years before settling into one location. To retire that early takes a plan. Our plan consists of different time buckets that will be treated differently for investment purposes. They are.

  1. From age 54 to 59.5. This is the time frame we will not be able to withdraw from IRA’s and will not have social security income. This may be the most critical time period because the funds are limited comparatively to the overall funds. Some or all of this time will be spent traveling the country in our motorhome. This will be called the Motorhome bucket
  2. From age 59.5 to 62. During this time frame we can withdraw from IRA’s but will not have social security income. This will be called the IRA bucket
  3. From age 62 and older. We can withdraw from IRA’s and will have social security income during this time. This is the longest time period so the plan here will be more of an outline and execution of this plan will be more dynamic in nature, responding to market conditions more so that the other buckets. This will be called the Full Retirement Bucket.

Today I am going to opine more on the Motorhome Bucket.

The 401(k)’s

We both turn 55 in the year 2020. In order to retire in 2020, we need to use our 401(k) accounts before we turn 59.5. Normally 401(k) withdraws before the year in which one turns 59.5 are subject to a 10% penalty in addition to the normal income tax. Fortunately, there are some general exceptions and additional exceptions to this additional 10% tax. In IRS publication 575, the first additional exception reads.

“From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55

In other words, if one leaves the employer (one way to do this is to retire) during the year he/she reaches the age of 55, the funds can be withdrawn from that employers’ plan without the 10% penalty. Of course, the regular income taxes are still due.

The money from the 401(k)’s, money market, T-bill portfolio and the income from our High Yield Portfolio have to last us from July 2020 though January 2025. (We will both turn 59.5 in 2025 so that makes our IRA funds available to us at the first of the year.) We are going to spend these funds down during Motorhome Retirement. These funds amount to only about 10% of our total retirement assets. It could be more or less than 10% by the time we retire but spending 10% of savings to live 4 years is not a bad deal, considering the general retirement advice to spend 4% per year. There are a lot of DGI folks out there that say the thing to do is just live off the income or dividends. To do that we would have to wait 4 and a half years or take what is called a 72T exception withdraw. Without going into a lot of detail about the 72T exception, we do not want to do that because it is very restrictive and if not done correctly, the 10% penalty would have to be paid anyway. We are not going to attempt a 72T exception and we are not going wait because we believe we have enough. The initial spending rate of 10% for 4 years would last forty years even if we had no income from our dividend growth accounts or social security. So, to all the DGI diehards out there, we can agree to disagree on this. At least until 2025. After that, I foresee becoming a DGI diehard as well.

We are continuing to add to our 401(k) accounts each month to the tune of about $960 per month. The purpose for these contributions is to get the company matching funds. Both companies add the matching early each year for the previous year. Because we will be using this money starting in two years, it is all invested in money market or stable value type funds. The return is dismal but it is better than risking loss should the markets melt down.

Finally, for our cash accounts we have non-qualified money markets, T-bills and CD’s. The plan is to save an additional $4,000 each month to these amounts.

How it all fits together

The other source of money for the first years of retirement is the high yield portfolio that is currently under construction. It currently generates about $500 a month of income.

Before we look into the specifics of the high yield portfolio, let’s take a look at how these assets work together to fund the first few years of retirement. We are budgeting $72,000 per year or $6,000 per month for spending. We will spend the income from the high yield portfolio first, then the cash amounts to make up the monthly shortfall. Yes, the shortfall is much a much larger amount than the income from the HY portfolio. The following table is the plan from now until retirement day to ensure that the needed funds will be there.

Plan of final stages of savings accumulation

Months needed funding from July 2020 - January 2025 = 54

Month

Monthly income from HY portfolio

Months funded by HY income savings, and 401(k)'s

Funded months needed

10/1/2018

$500.00

34.8

54

11/1/2018

$506.67

35.6

54

12/1/2018

$513.33

36.5

54

1/1/2019

$520.00

37.4

54

2/1/2019

$526.67

38.3

54

3/1/2019

$533.33

39.2

54

4/1/2019

$540.00

40.1

54

5/1/2019

$546.67

41.0

54

6/1/2019

$553.33

41.9

54

7/1/2019

$560.00

42.8

54

8/1/2019

$566.67

43.8

54

9/1/2019

$573.33

44.7

54

10/1/2019

$580.00

45.6

54

11/1/2019

$586.67

46.5

54

12/1/2019

$593.33

47.5

54

1/1/2020

$600.00

48.4

54

2/1/2020

$606.67

49.3

54

3/1/2020

$613.33

50.3

54

4/1/2020

$620.00

51.2

54

5/1/2020

$626.67

52.2

54

6/1/2020

$633.33

53.1

54

7/1/2020

$640.00

54.0

54

Source: Author created spreadsheet

The High Yield Portfolio

In addition to the current balance, this portfolio gets $2,000 per month added to it to invest. The guidelines for new investments are as follows.

  • The minimum yield for new equity investments in this account is 4%. Although, exceptions can be made for high quality, high dividend growth issues when yields pop up over 3% or so.
  • Stocks with low beta and low standard deviation are preferred.
  • Fixed income investments will be short duration funds or individual issues.
  • Preferred stocks will be part of the portfolio.
  • Dividend safety is paramount.

These guidelines are a starting point. They may change at if market conditions in either the equity or fixed income markets change or if I find an idea I think is better suited for the portfolio.

As it currently exists, the portfolio does not meet the above guidelines. We have some work to do to improve the portfolio in light of the stated guidelines

So here is a peek at the portfolio as it exists today.

Symbol Description QTY Value Percent of Portfolio Dividend Income Yield
NOBL PROSHARES S&P 500 482 $30,657 20.50% $1.39 $670 2.2%
THOPX THOMPSON BOND FUND 2330 $26,628 17.81% $0.34 $790 3.0%
T AT&T INC 450 $14,625 9.78% $2.00 $900 6.2%
KMB KIMBERLY CLARK 80 $8,802 5.89% $4.00 $322 3.7%
MO ALTRIA GROUP INC 113 $6,885 4.60% $3.20 $362 5.3%
O REALTY INCM CRP MD PV$1. 105 $6,081 4.07% $2.65 $278 4.6%
EPD ENTERPRISE PRDTS PRTN LP 212 $6,046 4.04% $1.73 $367 6.1%
CVX CHEVRON CORP 46 $5,417 3.62% $4.48 $207 3.8%
GABPRG GABELLI EQUITY TRUST 220 $5,087 3.40% $1.25 $275 5.4%
OMI OWENS &MINOR INC NEW COM 317 $4,780 3.20% $1.04 $330 6.9%
XOM EXXON MOBIL CORP COM 53 $4,329 2.90% $3.28 $173 4.0%
PG PROCTER & GAMBLE CO 50 $4,012 2.68% $2.87 $143 3.6%
PM PHILIP MORRIS INTL INC 37 $3,238 2.17% $4.56 $169 5.2%
VZ VERIZON COMMUNICATNS COM 55 $3,006 2.01% $2.41 $133 4.4%
ETPPRC ENERGY TFR PTNRS L.P. 100 $2,529 1.69% $1.84 $184 7.3%
CFRPRA CULLEN/FROST BANKERS INC 100 $2,457 1.64% $1.34 $134 5.5%
STTPRC STATE STREET CORP 100 $2,302 1.54% $1.31 $131 5.7%
RNRPRE RENAISSANCE RE HLDGS LTD 100 $2,290 1.53% $1.34 $134 5.9%
UTX UNITED TECHS CORP COM 14 $1,745 1.17% $2.94 $40 2.3%
SO SOUTHERN COMPANY 36 $1,595 1.07% $2.40 $86 5.4%
GEL GENESIS ENERGY L P 54 $1,337 0.89% $2.16 $117 8.7%
AXP AMER EXPRESS COMPANY 10 $1,051 0.70% $1.56 $16 1.5%
BPL BUCKEYE PARTNERS L P 25 $863 0.58% $5.05 $126 14.6%
Money accounts $3,754 2.51%
Total $149,516 100.00% $6,087 4.1%

Source: Author created spreadsheet. All values as of market close on 10/18/2018.

We are going to sell this one

There are things that are concerning in this portfolio. Three that immediately jump out are:

  • Buckeye Partners LP (BPL). The yield is very high and a probable dividend cut looms on the horizon.
  • Genesis Energy LP (GEL). Recently went through a dividend cut and may not be trusted to not cut it again going forward.
  • Proshares S&P 500 Dividend Aristocrats (NOBL). Nothing really wrong with this issue, just perhaps too high a concentration for the yield.

The first and most glaring problem is (BPL). The yield is very high, making raising capital for projects expensive. BPL has suffered a recent credit downgrade. During the 2nd quarter earnings press release the Partnership said:

“Buckeye has previously stated its goals of maintaining the distribution level and preserving its investment grade credit rating. In light of Buckeye’s need to access capital to support its identified growth initiatives and the impact of ongoing market conditions in its segregated storage business, Buckeye has retained financial advisors to assist in a comprehensive review of its asset portfolio and financial strategy. “Because of these challenges and our overarching goal of maximizing stakeholder value, undertaking a review of a broad range of business and strategic options is appropriate,” …

There was further discussion regarding this in the conference call, Clark Smith, the Chairman and CEO went onto say:

“…we're assessing our capital structure and the potential benefits of transitioning to a self funding model for the equity portion of our growth capital requirements limiting our dependency on public equity market. Our strategy is to evaluate any in our business with strategic options that could drive long-term unitholder value and no option will be off the table in our view.”

Management was given several opportunities in the question period to say they would not cut the distribution and they declined to do so. The highest priority is maintaining an investment grade credit rating and no action to that end is off the table. They are also considering moving to a self-funding structure. Privatization was asked about and again, was not taken off the table. Selling assets was asked about and not taken of the table. To me all these options would be bad except perhaps privatization depending on the premium that would be paid. In real time I thought the market reacted positively to this news. I retrospect now, it looks more like a run up to capture the dividend.

Source: Seeking Alpha chart

The call was not all negative. They talked about the backlog of projects and generally painted a picture of growth going forward.

  • Construction has started on the South Texas Gateway terminal, a joint venture with Phillips 66 Partners and Andeavor and Eagle South Texas.
  • A product storage expansion at their Chicago Complex Midwest Hub. These assets are already under contract with BP Products North America.
  • Butane blending ability expansion in the Southeast and the Bahamas.
  • Asphalt handling expansion in South Carolina.
  • Other small and large projects were also eluded to but not called out specifically.

These projects are expected to contribute growth in the 2018-2020 time frame. The problem is the funding is expensive. Equity funding cost comes at almost 15% whether it be in common units or class C units. From 2018 – 2021 they have around $1.7 billion coming due that must be refinanced. With interest rates going up already, they cannot afford a loss of the investment grade credit rating. I believe the dividend will be cut. In a different portfolio with a different objective I might be inclined to wait this out due to the project runway. However, for the high yield portfolio, I will be selling this before the next earnings release/conference call in early November when they intend to announce the results of the review and the financial strategy going forward.

With this article, more detail was revealed about our plan for early retirement. There is still a lot of plan left and work to do to get there. In each article I will try to expand the discussion on the plan and also review one of the investments and any changes in the portfolios. Please join me by clicking the follow button.

This is not investment advice. This is only a review of what we are doing with our situation. Your situation is different and will call for a different plan and a different investment portfolio.

Disclosure: I am/we are long ALL STOCKS MENTIONED IN THE ARTICLE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The position in BPL will be sold in the next three trading days.