Hi all- I’m exploring a new potential FI strategy and would love thoughts and holes poked. This strategy puts together 72(t) and Rule of 55 from Sean Mullaney and Episode 203 of All the Hacks podcast “Saving on the Cost of College with Brad Baldridge”. In that All the Hacks episode, Brad talks about the "Expected Family Contribution”, now calculated via a formula called the "Student Aid Index" (SAI) from the FAFSA. It sounds like the difference between the tuition sticker price and the expected family contribution from the SAI can be filled by financial assistance/financial aid by the school. The SAI is calculated from “prior prior year” AGI (e.g. 2023 AGI for 2025 school year) plus a multiplication factor applied to certain assets. Notably, retirement accounts are fully exempt from the calculation.
A common FI early retirement strategy is to build up the "three legs of the stool” for tax diversification purposes by building up a taxable brokerage account for tax diversification purposes. However, if you’re planning to retire early around the same time as your kids are going to college, it could make sense to (1) build up your retirement accounts, especially your 401k, nearly exclusively (except for emergency fund) during your working years, (2) set up a “bucket/bridge strategy” within the 401k itself instead of in a taxable brokerage account or high yield savings account for the first few years post-retirement to alleviate sequence of return risks, (3) retire in the "prior prior year" before the first kid starts college, and (4) have your exclusive income be from the safe buckets within your 401k via 72(t) or Rule of 55 distributions (assuming retirement before 59 1/2). This assumes that your post-retirement income needs would be less than your working salary, which is reasonable for a number of reasons (e.g. no need to save in 401k, less work-related expenses, etc.). In this scenario, the SAI would only look at the income distribution from the 401k and not the balance of the 401k when considering expected family contributions and then would also look at your 529 balance but would apply a pretty modest factor to it (5.64% of the account balance). The theory here is that there are two options for these years: (1) keep working and use the higher wages earned to pay higher out-of-pocket tuition costs to the school (or, even worse, shoulder your kid with higher loan balances), or (2) stop working and let your lower cost of living needs drive a lower out-of-pocket tuition cost. If the delta between those two options is even remotely close, then it seems like you’re essentially working for no marginal increase in net worth - you’re just paying out the extra money you’re receiving to the school. In that lens, it seems similar to the “work and pay daycare” or “quit working and stay home” analysis for little kids - the scenario where one could basically just work in order to pay daycare if their after tax salary is close to the daycare cost.
The strategy is to focus exclusively on building up that 401k during the working years at the exclusion of rental properties, taxable brokerage accounts, etc. Then it’s to be prepared for 72(t) or Rule of 55 and retire in time for the “prior prior year” AGI calculation to take into account the post-retirement income and not the working year salary.
Perhaps the savings just isn’t worth it in the end, I haven’t done the math. Any thoughts?
