WARNING – Use this advanced technique with extreme caution!
*** This is an advanced, somewhat complicated technique wrought with peril. Consult a tax advisor and use very carefully, if at all. ***
As a financial advisor, I often stress that you cannot save ‘too much’ in a tax-advantaged retirementaccount. Even though you generally can’t touch your IRA or 401k earnings without paying a 10% penalty until you’re 59.5 years old, there is an option to get at that money and avoid this penalty. Because of this option, it usually makes sense for everyone to max out their tax-advantaged retirement savings before they invest in a taxable account, even if they a) want to retire early (pre-59.5) AND b) they have very little in non-retirement savings.
The IRS has a rule called 72t that allows you to request ‘Substantially Equal Period Payments’ (SEPP) for at least 5 years or until you’re 59.5, whichever time period is longer (so, age 59.5 for most early retirees!)
(There’s another option which I’ll cover later called the ‘Roth IRA conversion ladder‘ which involves moving your 401k/Trad IRA to a Roth a bit at a time each year, waiting 5 years from the first year you do this because the IRS requires it, then taking withdrawals of the contributions you rolled over 5 years earlier.)
How SEPP / rule 72t works
The basic idea is that the IRS lets you take ‘substantially equal payments’ from your Traditional IRA each year– or each month– whenever you want to start them. These payments must continue for the greater of 5 years or from when you turn 59.5, and there are severe penalties if you change your mind. You are also very limited on how much of the money you can get your hands on, since the IRS wants it to last until you die. However, the devil is in the details, so read on!
Once you begin SEPP payments you cannot add to that SEPP IRA or take more money from it for 5 years or age 59 ½, whichever is longest. It is best not to commit all of your IRA funds to a SEPP. That way you have side emergency IRA money outside of the SEPP.
There are 3 different methods to calculate payment and the IRS has restrictive rules for the payment amount. The SEPP IRA amount is based on your age, gender, and the long-term bond rate at the time of establishing the 72(t) SEPP.
Work with a qualified tax professional or financial adviser to correctly set up the SEPP. If at any time you deviate from the substantially equal periodic payments within the IRS guidelines, you may have to pay the 10% early withdrawal penalty going all the way back to day one.
You first need to decide how much money you want to tie up in your SEPP IRA. Once you allocate the money to be paid to you in SEPP form (roughly equal payments for at least 5 years or until you’re 59.5), you generally cannot change this amount. So, you need to think very carefully about how much you want to lock up in the SEPP, and how much income from this SEPP you want to receive (dependent on your market returns during the life of the SEPP.)
First, look up the maximum interest rate you can use by using the last two months prior to the month you’re going to start the payments. Choose whichever of those two prior months had the higher rate if that’s your goal.
Then, plug that rate along with your other info, including the size of the IRA you’re going to use into a 72t calculator like this one from Bankrate to get your fixed dollar payment number as a monthly amount. (Or, start with the dollars you need and then back into the account size of the IRA you need, and move money from your other IRA(s) or rollover your 401k to fund the IRA that you’re going to use solely for your SEPP.)
Here’s a screenshot for a 50-year old person who plans to use $500,000 in IRA funds and chooses the single-life expectancy method, which yields the highest payout possible if you also choose the ‘fixed amortization method’:
This says our hypothetical 50-year-old could start taking annual payments of nearly $18,000 on a $500 K IRA that they designate for SEPP use, which is about $1,500 per month. Not a lot to live on, but it could make the difference between retiring early vs continuing to have to work full-time if you have other income sources.
How do you set up SEPP payments from your IRA?
You could pay a financial advisor or CPA who is knowledgable about this to set one up for you if you’re daunted by the math. I’m a big DIY guy when it comes to finance, and I’m a financial advisor, so personally I would feel comfortable running the numbers, dividing the annual amount by 12 months, and setting up an automated withdrawal for that amount from my (SEPP-earmarked) IRA at Vanguard.
What investments should you choose?
You can change your investments as you go, just like you can with any IRA, but I would recommend something tailored to your current age and overall risk tolerance. A target retirement fund matching the year you turn 59.5 might be a good choice (e.g. the Vanguard Target Retirement 2030 fund for our 50-year old in 2021), but you should do some hard thinkin’ on this or consult a financial advisor.
What if you run out of money before you turn 59.5?
Well, you run out of money for one thing and therefore don’t get anymore SEPP payments. The good news is that the IRS won’t consider that a violation of the 72t rules and will not assess you a 10% penalty + interest going back to your first payment like they would if you chose to discontinue payments prior to 59.5. (Per this IRS source courtesy of Leisurefreak. But check with your accountant on all of this, including this scenario. I am not a CPA!)
The other good news is that you can do a one-time switch of accounting methods from the fixed-dollar methods (fixed amortization or fixed annuity) to the more flexible RMD method where your withdrawal amount will change annually based on your account balance (and life expectancy.) This might help you reduce your withdrawals if the market tanks, but of course it doesn’t help your income needs.
Should you actually do this?
The SEPP is a way for people who do not have enough income + Roth IRA contributions + taxable investments to retire early (pre-59.5) but would still like to do so. If you’ve been maxing out your 401k all along, but saving little else, this might be you.
My preferred solution to early retirement– and the one I’ve been lucky enough to accomplish by the time I turned 38– is to just max out your retirement accounts and THEN save a lot in your taxable accounts, using these until you turn 59.5 and can tap your Traditional IRA/401k. However, this requires enough income-net-of-expenses-taxes-retirement to be able to do it. For most people reading this will mean making over $100,000 a year at least for many years. Fortunately, most people reading this are exactly in that situation and could do it if they cut their spending and used the Better Tomorrow Financial banking system.
A potential client came to me to ask about a variable annuity that he was being pitched by a large mutual fund company where he had investments. They told him how low-fee it was (relative to other annuities, which isn’t saying much!), and all about the supposed ‘tax benefits’ that a high income person would benefit from.
Unfortunately for this mutual fund company, I can both do research and do math, and was quickly able to cut through this salesperson’s BS. Let’s see why you are always going to do better with a plain ‘ol taxable index fund vs an annuity, even if you’re in the highest income tax bracket in America. Yep, you heard me. Given the fees of any annuity I’ve ever seen, you will NEVER be able to beat the performance of an index fund in a plain vanilla taxable brokerage account. Avoid annuities like the plague!
Annuities will not save you money vs index funds in a taxable account
For the taxable index fund, let’s use the Vanguard Target Retirement Fund 2050. It has an expense ratio of 0.15% and a dividend yield of 1.5%, which is pretty typical for the overall US stock market in recent years. (2% has been more in line with history, but it doesn’t change the conclusions below if DIV yields were to rise to that number.)
The variable annuity, on the other hand, has fees totaling at least 0.90%: a 0.25% ‘annuity fee’ and an underlying mutual fund with a 0.65% expense ratio. There are almost assuredly other sneaky fees that I didn’t need to look up, since the 0.9% expense ratio alone will tell us the taxable index fund is better.
Annuity salespeople will tell you that (non-retirement/post-tax money) annuities are tax-deferred, meaning you don’t pay dividend or capital gains taxes while they grow. This is true, but tax-free growth is not enough to overcome the greater annuity fees, not too mention other tax problems that annuities create when you go to cash them out.
Since you have to hold an annuity until age 59.5 to avoid the 10% penalty on the earnings distributed before then– another downside of annuities vs taxable accounts– it’s fair to assume you let the index fund grow and never pay any capital gains on it. So, your annual ‘tax fee’ for the index fund = 1.5% dividend yield * 23.8%, the highest possible dividend rate of 20% (as of writing) + the 3.8% net investment income tax (NIIT), which = 0.357%. Add that to the 0.15% expense ratio and you have an annual cost of 0.51%, nearly half the lower-bound 0.9% annual annuity expenses.
Annuities are taxed at income rates vs lower capital gains rates for stocks
Yep, so much for tax advantages while the money grows! It gets even worse for annuities when you cash them out. What the annuity salespeople DON’T tell you is that annuity gains are taxed at regular income rates vs much lower capital gains rates for stocks in a taxable brokerage account. (Of course, if you’re not already maxing out your retirement savings like your 401k or IRA, do that first before investing in a taxable brokerage for (early) retirement!)
So, not only did your annuity grow slower than your index fund after fees and (index fund) taxes, you’ll then pay 39.6%– if Biden gets his way and you’re in the highest tax bracket– for income taxes on the annuity vs 23.8% for the capital gains + NIIT on the index fund. (The math is similarly in favor of index funds in a taxable account for lower or middle income people.)
Even if dividend rates were set equal to income tax rates, the most you’d pay for the index fund would be 0.15% + 1.5% * 39.6% = 0.74%, still below the 0.90% in our example (and most annuities charge closer to 2%.)
If you really wanted to reduce your taxable dividends to pay even less on your index fund you could do something fancy, but personally I would just stick to the simple investment plan and eat the low taxes and avoid generating capital gains as much as possible.
Hire an advisor who won’t try to sell you something
If you want someone who is legally– and morally– bound to look out for your best interests, contact us today.
Can anyone refute my logic and math with a real-life example?
Do you know of a really low-fee annuity, or some other circumstances, that gives a counterexample with the annuity coming out better? If so, I’d love to hear about it in the comments! Please note that I intentionally left aside the ‘minimum guarantees’ and return/participation rate caps that shady annuity peddlers also push as ‘benefits’ but almost always work out against the investor and (surprise surprise!) for the insurance company pushing the annuity product.
In Part 3 we gave detailed gear recommendations and talked about how much food to bring. (2 lbs dried or fatty food per person per day.) Let’s get specific on what you might bring, and get you started with some easy and delicious meal ideas. If you just want the recipes, skip down to here.
What to eat?
The goal is lightweight, tasty, and quick & easy to cook and eat. ‘Lightweight’ means high caloric density, which means foods that are dry or fatty. Nerds like me can look at the nutrition label and divide the calories per serving by the grams per serving. Your goal is to average between 3 – 4 calories / gram.*
Dry carbs (3.5 – 4 cal/g) like flour, corn meal, pasta, oats, crackers, rice, beans, popcorn, dried fruit, and potato/corn/veggie chips are all good choices.
Butter (7 cal/g), vegetable oils (9 cal/g), lard/tallow, hard cheeses (4 cal/g), nut butters (6 cal/g), and dried meats like jerky (~2-3 cal/g) are great for fat and protein. Fatty, preserved fresh meat like bacon (6 cal/g), side pork, or sausage will keep at least a couple of days when buried in your pack with other cold stuff, especially if the nighttime temps are still in the 40s or below.
Gourmet tip: I pre-cook and pre-season fresh meat to dry it out a little and for easier meal prep, then throw it in a ziplock and add it last to warm up after cooking a carb base. It’s a real treat, and worth the extra water weight. Going for fattier meats like hamburger and sausag, and packing the rendered fat with the meat increases your efficiency vs using leaner meats.
Get the quick-cooking version of everything so that you can whip up a meal fast and with less cooking fuel. Go for instant rice, quick-cooking oats, instant mashed potatoes, thin pasta like angel hair or mini-pastas with 7 minute or less cooking times, ready-to-eat cereal, and instant refried beans. Instant mac & cheese is another winner.
For coffee, go instant, and go Arabica (the bean type) if you can. Starbucks Via is very good but a little more expensive (worth it!) Nescafe Clasico or Nescafe espresso (basically, the Italian-style ones) are ok. Nescafe Taster’s Choice and Folgers is gross. If you have a sweet tooth, Vietnamese-style 3-in-1 (sugar + milk + coffee) packets are convenient.
For tea, I recommend just bringing a few tea bags, or some loose tea that brews up quickly. The smaller the tea is chopped up, the quicker the brew, so go for ‘Broken Orange Pekoe’ vs full-leaf black tea.
For black tea bags, Twinings is quite good, as are Stash teas. For green tea, jasmine (a type of tea, not a brand) is nice and hard to go wrong with brand-wise.
I’m partial to Zarrin and Alwazah for loose-leaf teas, but they take at least 10 minutes to brew. Brooke Bond brews up in 5 minutes and is a solid choice. For $6 – 10/lb you can get great loose leaf tea from Ceylon (Sri Lanka) or Assam (India), often in the Eastern European/Russian/Middle Eastern section of your local ethnic grocer.
We mentioned milk above. Bring some sugar/sweetener in packets or in a ziplock if you use it.
Roobois is a good decaf tisane option, or mint or chamomile or other herbal tisanes. Korean/Japanese-style barley tea is a great decaf option for cold weather.
Whiskey (3 – 3.5 cal/g) is the go-to backpacking alcohol for me. With apologies to Samuel Johnson, anyone who aspires to be a hero must drink whiskey. Store it in a lightweight bladder pouch, like your 16 oz Sawyer mini one.
Any hard liquor optimizes for weight, although mixers and lack of ice present a challenge to the cocktail-inclined. (One reason to camp just below the snow line…?) Get creative with dry mixes that only require adding sugar or water. Citric acid in powder form could serve as a lemon substitute if you really wanted to build a lightweight cocktail, you unredeemable sot you.
Wine is ok for the weight. Transfer it into a sacrificial 1 liter pouch: it will forever taste like wine afterward.
Beer, or hard cider, is a wanton luxury. But, if you want to delight your friends and don’t mind a few extra pounds, surprise the group with a can for each at the end of the first day. The larger the can and the higher the alcohol content the more weight-efficient you’re being.
Beverages can be chilled in a glacier-fed stream or lake, but don’t lose them!
What meals to make?
I usually do a hot dinner and hot breakfast (with hot drinks) in camp, with a cold lunch and cold snacks in between while on the trail.
For breakfast, keeping it simple helps get a jump on the day, but if you’re lingering in camp, feel free to do it up with bacon, bannock (quick bread fried in your skillet or pot) or toast, and maybe rehydrated scrambled eggs or this Mountain House breakfast skillet (one of the better instant meal brands out there.) Fry your bread or eggs in your bacon fat. If you’re not too concerned with weight, crack out and beat some raw eggs and funnel them into a lightweight water bottle for easy scrambled eggs made fresh in camp.
Drink: Instant coffee, tea, or hot chocolate mix, with rehydrated milk or sugar.
Milk: Add 1/4 c Nido powdered milk to 1 cup water for 1 cup whole milk. It’s even better if you mix it up the night before and let it sit overnight.
Easiest: 2 oz cold cereal with 1/4 cup + 2 Tbl Nido powdered milk to 1.5 cups (12 oz) water (yields 1.5 cups milk.)
Instant Oatmeal for ONE person (double it for two):
Pre-mix in a ziplock bag at home:
1 individual baggie plain instant oat meal / 2 oz instant oatmeal (3 oz if you’re a big eater)
1/2 tsp cinnamon
1/8 tsp ground nutmeg/cloves/allspice (optional)
2 Tbl c Nido whole milk powder (if you omit this, reduce the water by 1/2 cup)
1 Tbl butter (optional for added calories & richness)
~1 tsp brown sugar to your taste (if using plain oatmeal; the flavored packets already have a ton of sugar)
In the morning, add 1.5 – 1.75 cups (12 – 14 oz) boiling water and stir and cover for 1 – 2 minutes. Do this right in your eatin’ bowl for easier cleanup. If it’s cold outside, adding more boiling water = more heat in your body!
Top with dried fruit, sliced almonds, fresh picked berries from the trail, and more brown sugar, cinnamon, butter as desired. You can also just use instant oatmeal packets vs mixing your own spices.
Lunch & Snacks
Crackers like saltines, Wheat Thins, Triscuits, Ritz (best for the weight) are all good options. Spread them with cream cheese, peanut butter, a slice of hard cheese, salami, pepperoni, or even smoked salmon. Jerky, nuts, trail mix, dried fruit, and granola are all good options for lunch and snacking.
Junk food like potato chips, Fritos or Cheetos (5 cal/g!), Cheez-Its, Goldfish, Pringles and the like are a treat. Consider durability though: Fritos and crunchy Cheetos hold up better in a backpack than Lays or tortilla chips.
Candy bars, power/trail bars (Clif), and chocolate are de riguer for sweets and quick carbs.
Pre-made sandwiches for a lunch on the trail the first day are worth it for convenience, or eat them on your drive to the trailhead and just plan on snacking until you have dinner in camp.
Now is the time to let your inner Jacques Pepin shine. The tent is assembled, your sleeping pad is inflated and your bag rolled out on top of it, and you’ve rested your weary back and feet a moment. Get cooking with these trail-tested recipes. Tsp = teaspoon, Tbl = Tablespoon, c. = cup, g = grams, and oz = ounces.
Lena Lake Bolognese (for two or three people)
At home: Fry 1 lb of hamburger with 1/2 of a large onion, diced, in 2 Tbl of either bacon fat, beef tallow, or olive oil over medium-high heat until everything is cooked through and most of the water in the meat and onions has evaporated.
Add 3 medium garlic cloves, minced, and 2 Tbl of red wine (optional), and your favorite pasta sauce spices: 1 tsp each of garlic powder, thyme, basil or oregano is a good mixture. Up the garlic powder if you aren’t using fresh garlic. [Yes, I realize I’m adding garlic in two forms. I love garlic!] Add salt and pepper to taste and one 6 oz can of tomato paste.
Fry it all on medium-low heat while stirring frequently to cook the paste and evaporate more water. Turn off the heat after ~3-5 minutes when things looks fairly dry and thick (this is just to save weight, so don’t sweat it too much.)
Dump the sauce into a ziplock bag when it’s cooled to room temp. Pack a 1/4 cup or so of grated parmesan or pecorino romano cheese in a separate ziplock. If you want to get fancy bring some red pepper flakes and a small container of olive oil to drizzle over the top, or even a handful of fresh basil leaves.
In camp: Bring enough water to a boil in a 2 quart pot to boil 8 oz (for two people) to 12 oz (for three) for the time it says on the package. I use angel hair because it cooks up a few minutes faster than regular pasta, but any kind will do.
Cook your pasta to al dente, then artfully eyeball the amount of cooking water you want to keep in the pot, and add your sauce. If you’ve dried your sauce out and estimated, you’ll have the perfect amount of liquid to rehydrate your sauce to the right consistency.
The less confident can pour off a few cups of the hot pasta water into a mug or two and then add back liquid as needed after you dump in the sauce.
Portion out the sauced pasta to your guests and have them garnish with the cheese or any extras you brought. Bon appétit!
Quick-cooking pasta and frying your sauce at home makes for an easy one-pot meal that also impresses.
Ward’s Thai curry noodles for TWO:
2 thin vermicelli ‘bean threads/glass/cellophane noodles’ clumps (~34 g per clump; get from Asian mart. These are usually made from mung beans or pea starch, NOT the thicker Vietnamese-style rice vermicelli.)
Fry the curry-oil-flake ziplock mixture at medium heat for 30 seconds to a minute while mixing it into a paste.
Add the coconut milk powder & 12 oz water (and dried meat/tofu, if using), mix, and bring to a simmer.
Add the noodles and cook for 1 – 2 minutes until softened and spread out. I bring a pair of wooden chopsticks to tease them apart, as well as for stirring the paste and serving them out to the group, but you can use your spork too.
Add your cooked meat or tofu on top, then turn off the flame and cover for 5 – 7 minutes until the noodles are fully cooked (they cook quickly; don’t reduce them to mush!) and meat is warmed through.
This one is a real winner if you like Thai curry and have access to an Asian grocery store to get the ingredients. (Or get them online for a little extra.)
Robert’s Sage and Butter Pasta
At home: combine a handful of dried or fresh sage leaves and butter (1/4 stick per person) in a ziplock bag.
In camp: boil 4 oz dry pasta per person per the package instruction. Either dump out the pasta water or save it to drink (nice in cold weather), and portion out the noodles, keeping them warm as best as possible.
In the now-empty pot, melt the butter on low-medium heat, then add your sage leaves, along with any pre-cooked meat if you’re using it. Fry the sage leaves until just crispy, but don’t burn them. Portion out the sauce over everyone’s noodles.
Garnish with the same kind of toppings as in the bolognese recipe above: cheese, red pepper flakes, garlic powder, olive oil, or maybe some anchovies if you really want to blow your skirt up.
A simpler pasta dish than the bolognese that still impresses. Add pre-cooked chicken or Italian sausage if you want meat in it.
Cover your pot with a 1-kernel-thick layer of unpopped popcorn and add 1-2 tablespoons of vegetable oil, Crisco, or lard + 1 Tbl salted butter, reserving another 1 Tbl salted butter to add afterward.
Heat your pot with the lid on over medium/medium-high heat until it starts popping. Lower the heat if you need to to avoid burning it. Wait ’til the popping slows down significantly, shaking the pot gently with your gloved hands while it’s cooking to keep from burning it.
Add the remaining butter, and any extra salt to taste, stir, and serve warm in the pot.
If you use unsalted butter, bring some salt to taste.
You can pre-mix everything, including the kernels, salt, oil/fat, and half of the butter into a ziplock, keeping the extra butter separate to add at the end. I like to use a solid fat like Crisco or lard since it’s less likely to leak out of my ziplock. Double-bag it just in case!
Cold snacks are easiest, but popcorn is a surprisingly simple and weight-efficient snack to make in camp. It comes out of the pot piping hot, which is a treat in cooler weather.
If you want something simpler for dinner, Mountain House makes freeze-dried meals that aren’t bad. Some are better than others. The ‘Breakfast Skillet’ is a good choice for a just-add-water hot breakfast. Everything instant tends to be pretty salty and not as good as if you cooked it yourself, however.
An option in between boil-in-bag dried meals and doing your own cooking from scratch are quick-cooking carb sides that you can add things to. Knorr Rice and Pasta sides are inexpensive pre-seasoned carb dishes that you can add pre-cooked meat or veggies to, along with spices or dried onion & veggie flakes. One package can serve two people if you add extra meat and butter/olive oil to them.
Don’t sweat the recipes too much, because everything tastes better on the trail. A mediocre instant meal at home will taste like a gourmet feast in camp after a long hike in.
For car camping, I use and recommend the classic 2-burner Coleman camping stove. The lid doubles as as a windscreen, and it’s quite powerful and provides a nice stable surface for cooking. I’ve had mine for many years and it still works great. Buy these portable fuel canisters (a cheaper generic brand is fine too), or figure out how to rig it up to your gas grill’s 30 gal tank if you’re going to stay awhile/cook for a crowd. You definitely want a propane-fueled stove vs pure butane for car camping since butane stops working as you get close to freezing temperatures.
What do YOU like to eat in the backcountry?
Tell me about your favorite camp meals in the comments, and happy cooking!
In our next post we’ll answer some frequently asked questions about backpacking.
*Technical food discussion for nerds
Water and fiber don’t provide calories, so in general you want dry food. Fat is the most efficient at 9 cals/g, carbs & protein each have 4 cals / g, alcohol has 7 g/cal, but usually lots of water with it…
Thus, pure fat with no water in it, like oil or lard, is the best you can do weight-wise. A completely dry white carb like flour or pasta would be about 4 cals/g (there’s always a little fiber or water usually, so it’ll be slightly less.)
Take 10 minutes now to remove yourself from junk (e)mail and telemarketing lists using the links below and you’ll get more time back, spend less on things you didn’t want in the first place, and cut down on wasted resources.
1) To get off ~80% of direct mail marketing lists, go to https://www.dmachoice.org/ and register for an account. Then, go through the 4 categories of direct mail and request that all mail be STOPPED.
Follow the link on DMA Choice to a separate site (OptOutPreScreen.com) to stop those annoying credit card offers. You can electronically remove yourself for 5 years, or (my recommendation) print out and mail in the paper form to be removed PERMANENTLY.)
2) From the same folks that brought you the above link, go to http://www.ims-dm.com/cgi/optoutemps.php to remove up to 3 emails at a time from commercial emailing lists. (You’ll still get spam email from other sources outside of the DMA’s control, but this should help reduce the total burden.)
3) Go to www.donotcall.gov/register to register up to 3 phone numbers at a time (including cell phones) with the federal governments National Do Not Call list.
4) (optional) For getting off specific catalog mailings (such as ones from companies that you had bought from in the past), go to http://www.catalogchoice.org and they will submit an email on your behalf to remove you from whichever companies’ catalogs you select.
6) For miscellaneous promo mailings, try this tip from the helpful bureaucrats in Yamhill County Oregon.
First, look for any of the following phrases: return service requested, forwarding service requested, address service requested, or change service requested. If you find any of these phrases, write "refused, returned to sender" on the unopened envelope. Mail sent to "Resident," "Current Resident," or "Current Occupant" can be refused if it contains one of the above endorsements, or is sent First Class. When you receive unsolicited promo products, you can mark the envelope “Return to Sender” and put it back in the mail.
Each of these registrations is free, and with the exception of the mail-in credit offer removal in step 1, can be done in about 5 minutes onlinewith a valid email account. If at any time you decide you actually WANT to receive junk mail/telemarketing calls etc, you can change your preferences with each organization.
Less time filtering junk mail and spam calls = More time to relax and enjoy life!