I’ve just had a recent revelation that is a little embarrassing to admit.

As someone who prides oneself on mathematics, planning, and accuracy, I’ve found a large flaw in my early retirement plan. Let me share it with you, it’s called my 401k.

I’m sure you’re surprised to hear this, especially since I give out advice on the topic of the 401k among other types retirement accounts. But as I learned recently, the 401k becomes quite a different beast when mixed with early retirement.

You’re probably thinking: wait a minute. Why wouldn’t retirement and retirement savings account be synonymous? Well, for the traditional American retirement, they’re designed to be.

In truth, aside from pensions, annuities, or social security, there are two ways to think about retirement savings. The first, which is common yet less sophisticated, is that one saves enough money in some sort of savings account, invests none of it, and withdraws from the account until the end of his or her life. Hopefully they’ve factored in some sort of a buffer, but the person will finish with the account being mostly depleted. Not to mention that they will have to save a TON of money just to retire.

The second way is based off the 4% rule, or off of other rules factored around using your life’s savings as an investment vehicle. That means that your entire investment portfolio is generating enough passive income for you to draw on and cover your expenses year after year. With this second way, you don’t have to save an insane amount of money, and as long as you have enough of a nest egg, you will be generating enough passive income through capital gains and dividends to continue your current lifestyle, forever. This also assumes that your principle investment will never go down, and may even go up over time in favorable markets.

Aside from experiencing a serious windfall (and I mean serious!), the only way to achieve early retirement for us mere mortals is with method #2. Which is exactly what I have been doing.

When you plan for retirement, you expect to have all your dollars working for you throughout the duration of your retirement, starting on day 1. For a traditional retirement, that may be around age 65. In that case, withdrawing from your 401k will be no problem, since you will be past the withdrawal eligibility date of age 59 ½. This is what the 401k was designed for: to be an investment vehicle for the traditional retiree.

But in my case, I will be retiring somewhere between the ages of 28-31. That is a long time before age 59 ½, when I’ll be able to touch a dime of that 401k. (Note: There are ways to access money from your 401k early, but I’m not looking to those at this time. I’ll explain more about how early 401k withdrawals work in future posts.)

My mistake, was that I assumed my total investment portfolio would be generating enough for me to quit my job and start living on my passive income to cover my expenses. So while my entire portfolio actually will be generating enough to cover my expenses of about $20k-$30k per year, a portion of those will be in my 401k, which I cannot draw from.

For perspective, about 30% of my net worth is in currently retirement accounts.

So here I am, happily contributing the max each year to my employer’s 401k plan, watching my net worth go up and thinking I’m climbing closer and closer to early retirement.  When in reality, there’s a big chunk of my supposed passive income tied up in a 401k.

This doesn’t mean that the 401k is inherently bad. It’s still my money, still a part of my net worth, and I’d rather have it than not. It can also result in some great tax benefits for the early retiree later on. And this doesn’t even mean that if I had seen this flaw in my logic sooner, that I would have stopped making the same 401k contributions. I had a great employer match and it would have been silly not to take advantage of it, so my total net worth would be much lower if I hadn’t been making those 401k contributions. The other good news is that, at most, I’ve lost $18k a year to the retirement account. While that can set back my early retirement, $18k isn’t enough money to derail early retirement in the grand scheme of things.

And that money wasn’t simply thrown out the window.

It’s tax free, growing interest free, compounding like crazy year after year until I can withdraw from it. By the time it’s matured, it’ll be quite a windfall that I won’t even need come age 60. As health care costs tend to rise later in life, this may be a welcome sum of cash once it matures. It could also be a great way to make large charitable donations later in life, which is excellent, as I’m looking forward to being more philanthropic once I have the time and the resources.

Basically what happened here, is I’ve already accidentally over-saved for retirement, but in a way that didn’t facilitate my early retirement dreams. The best thing to do now is to get over this stumbling block, and focus on compounding my net worth, especially in my non-retirement accounts. I don’t really need a windfall later in life, as I’ve mentioned above. I’d rather get out of work sooner so that I can gain my flexibility and my freedom.

I want to share my mistakes and oversights here with you. That way you know that I’m human, not perfect, and still learning as I get closer and closer to early retirement. And if you see what I’m doing wrong, hopefully you can avoid the same mistakes.

All is not lost in achieving my early retirement goal. This just means that I have to rethink how I’m allocating my money and how this misstep may lengthen the number of working days until my retirement date.

I’m still mulling this over, and so, with a little recalculating, the march towards early retirement continues.