Early Retirement Pitfall: Man Faces Liquidity Crisis Despite $2.4M In 401(K)

An early retiree found himself cash-poor despite having $2.4 million in his 401(k) account.

What Happened: In his early 20s, Eric Cooper received advice to maximize his 401(k) contributions, which he followed diligently throughout his 25-year career.

By the time he retired at 48, he had accumulated $2.4 million in his 401(k) account. Although Cooper acknowledged that maxing out his retirement plan was one of his most intelligent financial decisions, he also admitted it was his “biggest mistake” due to the lack of liquidity.

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Why It Matters: Cooper had saved so much in his 401(k), but when it was time to retire, he didn’t have a lot in his brokerage account that was easily accessible.

“So, while I was rich on paper, I did not have a lot of cash on hand,” he told Insider.

Withdrawals from retirement accounts like a 401(k) or IRA typically incur a 10% penalty if taken before age 59. Cooper realized he should have allocated more funds to a brokerage account to avoid this issue.

Cooper discovered the FIRE (Financial Independence, Retire Early) movement in 2019 and adjusted his financial strategy.

He reduced his 401(k) contributions, increased his brokerage and savings account contributions, took on a part-time job, and researched IRS rules for penalty-free withdrawals.

Cooper utilized Section 72(t) of the IRS code, which allows individuals under 59 ½ to take substantially equal periodic payments from a retirement plan without penalties.

He calculated his $20,000 annual distribution using the IRS’s single-life-expectancy table and a 72(t) calculator.

Despite the restrictions, Cooper found this method beneficial for enjoying his money now and reducing future tax burdens when required minimum distributions kick in at age 72.

Cooper’s story highlights a significant issue faced by many early retirees: the challenge of liquidity. While saving diligently for retirement is crucial, having accessible funds is equally important to avoid penalties and financial strain.

The FIRE movement recently gained popularity and emphasizes financial independence and early retirement. However, it also underscores the need for a balanced approach to saving and investing.

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This story is part of a series of features on the subject of success, Benzinga Inspire.

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