My last SEPP 72t IRA payment was just delivered. I now close the door on government control over my early retirement funding. For the last 7.75 years I had IRA penalty free withdrawals using what the IRS calls substantially equal periodic payments (SEPP). I thought I would share how the IRA did from its original funding to its last payment to me.
I think this could be of interest whether anyone is considering a SEPP 72t approach to early retirement funding or not. It gives a glimpse into the impacts of investment allocation, a bad investment, and what a rigid withdrawal rate has on an IRA over several years of retirement funding.
SEPP 72t IRA Basics
The SEPP 72t is an IRS rule that allows someone to make pre-age 59 ½ withdrawals from an IRA without having to pay the early withdrawal 10% penalty. Only your normal income taxes would apply.
The IRS 72t rule dictates the withdrawal amount. It is based on current bond interests rates, your age and your life expectancy at the time of beginning the 72t. The idea is that your IRA would survive long enough to fund your retirement for your lifetime.
There are 3 IRS approved withdrawal methods and you can make one withdrawal method change during the life of the SEPP 72t.
The 72t payments must run its course once began for the longer of 5 years or you reaching age 59 ½. In my case the run-time was to age 59 ½, making my 72t in play for 7 years and 9 months to complete my 72t run-time rule obligation.
Run afoul of their rules and the IRS will assess the 10% IRA early withdrawal penalty back to the very first SEPP 72t payment you received plus applicable interest. That applies even if the IRA fails before meeting the obligated run-time length rules. Careful investment allocation is advised so that a market crash doesn’t send the 72t IRA into funding default.
It is for these reasons I used a CFP to set up and manage my 72t IRA. It is advisable to not lockup all of your retirement IRA funds in a SEPP 72t. Always hold some of your retirement portfolio separate from the 72t.
My SEPP 72t IRA Details
My SEPP 72t began February 2010. At that time the IRS allowed 72t interest rate was around 3.5% to use in the SEPP calculation.
Looking today at the allowable set interest rate to use online on the 72t.net calculator, it seems the interest rate to use is 2.4% for December 2017 and estimated to be 2.54% for January 2018. The approved interest rate changes as bond rates reset.
72t IRA Balance Details
My SEPP 72t began Feb 2010 and ran until Nov 2017 = Obligated run-time 7 years, 9 Months.
72t IRA Beginning balance – $665,000
72t IRA Ending balance – $586,528
The 72t IRA Amounts Paid Out During IRS Obligated SEPP Timeline
72t IRA Early Retirement Income Paid – $260K
72t IRA CFP Fees (estimated) – $39K
Total Amount 72t paid out = $299K
Figuring Out The 72t IRA Results
The first observation is that the 72t IRA is down $78,472 (11.8%) from my initial investment. That may seem odd given the run-up in the stock market since February 2010 to now. There are a couple of issues that I believe addresses this result.
One of my investments (highlighted below) took a 40% dump. This represented a large part of the SEPP 72t IRA $78,472 deficiency when only looking at the beginning and ending totals.
The SEPP 72t withdrawal calculation used a bond interest rate of 3.5% within its algorithm. Bond rates were higher at that time than they are now. This resulted with what was a 5% withdrawal rate of the total funding SEPP IRA. There was no yearly inflation adjustments but this is still far higher than the well discussed 4% safe retirement withdrawal rate. That 4% rate is now challenged as being too aggressive as a safe withdrawal rate. A 5% withdrawal rate clearly has an impact on the portfolio.
The SEPP IRA was conservatively invested and designed to chase yield. It did not benefit as much as it could have had there been more stock exposure. This was done purposely. The rest of my portfolio outside of the SEPP 72t IRA was invested heavier in stocks. The overall portfolio was considered for an appropriate investment allocation when looking at stock to bond and international to US investment ratios. This was also done to avoid 72t default in the event of a stock market downturn.
Even after the above considerations, the SEPP 72t IRA produced enough income and growth to pay out $220.5K overall ($299K paid out minus the $78.5K beginning to ending IRA balance deficiency).
How My SEPP 72t Was Invested
Please note that the 72t IRA had investment changes over it’s 7.75 year run and this is the current (11/24/17)snapshot/reported yield.
Cash = $34,066
Investment Mutual/UIT Funds = $552,462
Total SEPP IRA Value = $586,528
Invested Mutual/UIT Funds
ACETX – INVESCO EQUITY & INCOME $40,509.06 (7.33% of 72t) Yield 1.76%
BIICX – BLACKROCK MULTI ASSET INCOME INSTL $29,362.14 (5.31% of 72t) Yield 4.5%
DIFIX – MFS DIVERSIFIED INCOME $29,881.61 (5.41% of 72t) Yield 3.2%
FGIYX – NUVEEN GLOBAL INFRA $35,119.09 (6.36% of 72t) Yield 2.76%
FRIRX – FIDELITY ADVISOR REAL ESTATE INCOME $37,563.30 (6.8% of 72t) Yield 4.08%
FSRIX – FIDELITY ADVISOR STRATEGIC INCOME $94,852.42 (17.17% of 72t) Yield 3.18%
MBDIX – MFS CORPORATE BOND $67,315.98 (12.18% of 72t) Yield 3.38%
MLPOX – OPPENHEIMER STEELPATH MLP ALPHA $19,307.78 (3.49% of 72t) Yield 8.1%
OIBYX – OPPENHEIMER INTL BOND $59,600.10 (10.79% of 72t) Yield 4.18%
OOSYX – OPPENHEIMER SENIOR FLOATING RATE $57,604.36 (10.42% of 72t) Yield 4.44%
PXHIX – PAX WORLD HIGH YIELD BOND INSTL $81,346.39 (14.72% of 72t) Yield 5.46%
It’s easy to see that a higher IRA withdrawal rate, an investment loss, and a yield focused conservative investment allocation can result in a lower portfolio balance regardless of any prolonged market recovery.
As I move into Phase 2 of my early retirement funding plans I will be using what was learned from the first 7.75 years of my SEPP 72t. I happily look forward to being able to have more control over my retirement account withdrawals going forward.
After considering everything, I do believe this was an early retirement funding success. I have enjoyed this adventure called early retirement much more than I could have imagined.
Using the SEPP 72t IRA rules to allow early access to my retirement accounts without penalty was definitely a successful strategy for my situation.