"Why You Are Probably Not Saving Enough In Your 401k"

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"Why You Are Probably Not Saving Enough In Your 401k"

Postby Taylor Larimore » Tue Aug 27, 2013 11:32 pm

Bogleheads:

This is a worthwhile read for many of us:

Why You Are Probably Not Saving Enough in Your 401k

Best wishes.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby bayview » Tue Aug 27, 2013 11:39 pm

Well, I wish I'd started sooner, although I'll never regret staying home to raise my kids, but I'm reasonably certain that I can't save more than my current $23,000/year. :D
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby surfhb » Tue Aug 27, 2013 11:56 pm

I just dont get why people are so focused on their kids education while disregarding their needs for retirement
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby stoptothink » Wed Aug 28, 2013 12:34 am

surfhb wrote:I just dont get why people are so focused on their kids education while disregarding their needs for retirement


Completely agree
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby bogleblitz » Wed Aug 28, 2013 1:11 am

deja vu, I felt like I've seen this headline before.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby Khanmots » Wed Aug 28, 2013 1:24 am

surfhb wrote:I just dont get why people are so focused on their kids education while disregarding their needs for retirement


Well, for my parents it was investing in their retirement. ;)
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby kingjimmy » Wed Aug 28, 2013 4:22 am

Maybe if you pay for their education you won't be paying for them to own a car when they are 40 and flipping burgers still? That could minimize your ability to retire too :-)

Also in my job as a underwriter for homes facing foreclosure, I've seen people pay for their kids PhD studies before paying their own mortgage. :-)
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby IlliniDave » Wed Aug 28, 2013 5:39 am

All I can do now is wake up each morning, put my feet on the floor, and do the best I can from there. The IRS won't let me contribute more than I am now. When I was younger I did the right things, had a plan that would have been okay, but I didn't foresee all of the wrenches the universe would deposit into the works.

Fortunately I have a lot of flexibility on the consumption side of the equation, and should get to check out of the full-time grind a decade early.

I don't have any hesitation recommending to young folks that they save until it hurts, then save a little more. If they get ahead of the game they can back off some in mid life.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby Mr Grumpy » Wed Aug 28, 2013 10:24 am

I am confused. The article indicates that roughly $220,000 will be spent per person on healthcare costs in retirement. I've read similar figures (up to $250,000) and would like to know where the information comes from. Assuming "on average," we have 20 years in retirement, we would be spending $12,000 per year on medical based on the figures given.

I realize the costs can differ based on where you live, etc, but with an advantage plan, the worst case is a payout from $0 to $4,000 per year (includes drug costs) = $80,000 per average retirement (and this scenario would be highly unlikely). With a supplemental plan covering the 20% (again, I realize costs can differ between states), but even with $200.00 per month with premiums in a good alphabet plan, that comes to $48,000 in 20 years.

Where is Jonathan Clements when we need him? Years ago, he shot down the notion that everyone should have anywhere from 6 months to 2 years in an emergency fund before starting investment. Some poor family starting out with two kids and a mortgage could loose 10 years of investing in their younger years, just trying to get to that figure.

I realize a senior can forgo the 20% medicare coverage - and gamble. Yes, in that case I can see the $220,000 to $250,000 lifetime cost, but only in that case.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby MoonOrb » Wed Aug 28, 2013 1:17 pm

Wow, how depressing is this particular excerpt?

A new analysis released Tuesday by Fidelity, the nation's largest retirement plan provider, found the average 401(k) balance was $80,600 at the end of June, up nearly 11 percent from the same quarter a year ago. For steady savers who were continuously employed in a workplace plan for the past decade, the average balance rose to $211,800, nearly 19 percent higher than a year ago.

Just doing nothing other than putting everything in an S&P 500 index fund would have returned close to 18%! They wouldn't have had to add even another dime. Thinking of it another way, contributors who invested just $833/mo in their plans (roughly $600 less than the max) could have equaled this improvement if their entire holdings were in cash. Yikes.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby #Cruncher » Wed Aug 28, 2013 1:30 pm

From the article Taylor references:
Assume you want to retire at age 67 and may live until your 93rd birthday. ... Fidelity took a look at how much 401(k) investors at various ages would need to save ... assuming a 5.5 percent annual return and not taking taxes into account. Here's what Fidelity's analysis showed: A 25-year-old just starting to save would only need put away about $160 each month to generate $1,000 in monthly retirement income.
I thought I'd do this calculation in Excel and post the formulas in case anyone wanted to do it themselves for different assumptions. * But I was surprised to get a much smaller figure than Fidelity's $160 / month. Fidelity also calculated the monthly savings needed assuming three later starting ages. Here are its figures and the ones I came up with:
Code: Select all
  Age     Fidelity     My Calc
  ---     --------     -------
   25         160          89
   35         270         165
   45         500         334
   55       1,154         834
I checked my formulas and they seem to be correct.

Assumptions:
Code: Select all
  Row   Col A
   1    1,000    Monthly withdrawal after retire
   2    5.50%    Annual return after retire
   3    5.50%    Annual return before retire
   4    93       Die at age
   5    67       Retire at age
   6    25       Begin saving at age

Amount needed at retirement:
Code: Select all
  Row   Col A
   8    312       Months after retire                                             =12*(A4-A5)
   9    0.4472%   Monthly return after retire                                     =(1+A2)^(1/12)-1
  10    0.24856   Present value of $1 in 312 months at 0.4472%                    =1/(1+A9)^A8
  11    168.04    Present value of Annuity of $1 over 312 months                  =(1-A10)/A9
  12    168,043   Amount needed at retirement to fund $1,000 monthly withdrawal   =A1*A11

Amount needed to save:
Code: Select all
  Row   Col A
  14    504       Months before retire                                            =12*(A5-A6)
  15    0.4472%   Monthly return before retire                                    =(1+A3)^(1/12)-1
  16    9.47553   Future value of $1 in 504 months at 0.4472%                     =(1+A15)^A14
  17    1,895.37  Future value of Annuity of $1 over 504 months                   =(A16-1)/A15
  18    88.66     Monthly savings needed to have $168,043 at retirement           =A12/A17

* Yes, I realize there are online calculators that do this, but I like to "roll my own".
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby Grt2bOutdoors » Wed Aug 28, 2013 3:17 pm

surfhb wrote:I just dont get why people are so focused on their kids education while disregarding their needs for retirement


The same reason why I'd give up my life to save theirs. It's instinctual to provide for the offspring. The same reason why you never get between a cub and it's mama bear. Because Mama Bear will put it all on the line and take you down before it lets harm come to it's cub.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby teacher » Wed Aug 28, 2013 6:33 pm

Mr Grumpy wrote:
I am confused. The article indicates that roughly $220,000 will be spent per person on healthcare costs in retirement. I've read similar figures (up to $250,000) and would like to know where the information comes from.


I think this is the source:
Fidelity® Estimates Couples Retiring In 2012 Will Need $240,000 To Pay Medical Expenses Throughout Retirement
http://www.fidelity.com/inside-fidelity ... costs-2012

The estimate, which is calculated by Fidelity’s Benefits Consulting business, does not include any costs associated with nursing-home care and applies to retirees with traditional Medicare insurance coverage.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby MathWizard » Wed Aug 28, 2013 7:12 pm

surfhb wrote:I just dont get why people are so focused on their kids education while disregarding their needs for retirement


1) Immediacy: College comes earlier, so you must deal with it first.
I always liked the ROTH in saving for college, because it did not lock me in, and I ended up using
the ROTH for retirement (so far) and paying out of pocket for college.

2) Return on investment: The best return on investing is in human capital. If your kids are an extension of your human
capital, this makes perfect sense, and is even longer-term planning than planning for your retirement because it spans
generations. (In my case, my grandfather lived with us when I was a child, and my MIL stays with us for a cuple of months
out of the year. My MIL and FIL took care of her FIL for a couple of years, so I think that my kids get it. They learn
by example.)

3) College seems pricey, but doable. The amount needed for retirment is so huge that people avoid even thinking
about it since it is so daunting.

I believed the choice was not between college for kids and retirement, it was a choice between a high lifestyle which could not be supported in retirement, and one that could. If I save 10% more now, then I will have a larger amount saved, and I'll have 10% less
of a lifestyle to support with what I have saved.
I expect that my portfolio at retirement will be between 10x and 20x (in constant dollars) what I will be spending on a public Univ
for my two children.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby friar1610 » Wed Aug 28, 2013 8:35 pm

surfhb wrote:I just dont get why people are so focused on their kids education while disregarding their needs for retirement


Hey, some of us focused on both. Paying attention to one doesn't mean disregarding the other. I will never regret giving my kids a great education! Probably one of the greatest things I could do for them. (Only 4 years; they did post-bachelors education on their own.) My goal was that both kids get through college with no debt (either on their part or mine.) But if there was to be debt, it would be theirs before it would be mine. As it turned out, neither I nor my kids had any debt for the bachelors degree. (They both incurred some debt for studies later on.) They are both doing well as adults and I feel very satisfied about that. But my wife and I also put away retirement money. I was also in an occupation which didn't pay great but had good retirement benefits. The key was living below our means. There were many times we wanted to move up to a bigger house but stuck with the one we had because the mortgage was low, we were able to save for both purposes and we still had a nicer house than either of us grew up in. I still managed to retire at 58, 10 years ago, and have been living comfortably for those 10 years. My point: it doesn't have to be an either-or choice.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby JamesSFO » Wed Aug 28, 2013 9:01 pm

friar1610 wrote:
surfhb wrote:I just dont get why people are so focused on their kids education while disregarding their needs for retirement


Hey, some of us focused on both. Paying attention to one doesn't mean disregarding the other. I will never regret giving my kids a great education! Probably one of the greatest things I could do for them. (Only 4 years; they did post-bachelors education on their own.) My goal was that both kids get through college with no debt (either on their part or mine.) But if there was to be debt, it would be theirs before it would be mine. As it turned out, neither I nor my kids had any debt for the bachelors degree. (They both incurred some debt for studies later on.) They are both doing well as adults and I feel very satisfied about that. But my wife and I also put away retirement money. I was also in an occupation which didn't pay great but had good retirement benefits. The key was living below our means. There were many times we wanted to move up to a bigger house but stuck with the one we had because the mortgage was low, we were able to save for both purposes and we still had a nicer house than either of us grew up in. I still managed to retire at 58, 10 years ago, and have been living comfortably for those 10 years. My point: it doesn't have to be an either-or choice.


For all that Suze Orman can get knocked on for a variety of things she always emphasizes retirement first and I think she uses the oxygen mask analogy, put your own on before your children's mask. It's a good one, and while these need not be either or, for many people it is hard to do both and given the choice, they really should do retirement first.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby baw703916 » Wed Aug 28, 2013 9:04 pm

I've been saving as much as I'm allowed to for the last 10 years. If that's not enough there's not a lot I can do about it.

That was (IMO) a flaw in the article. It says things like "out of every $1000 you earn you will have to save $X." But it never addresses how much you are allowed to save.

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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby CaliJim » Wed Aug 28, 2013 9:53 pm

I confirmed #cruncher's calcs....FWIW
Last edited by CaliJim on Wed Aug 28, 2013 10:25 pm, edited 3 times in total.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby Helot » Wed Aug 28, 2013 9:56 pm

kingjimmy wrote:Maybe if you pay for their education you won't be paying for them to own a car when they are 40 and flipping burgers still?


Yes, this. Except the "failures to launch" I know all have college degrees. Some have advanced degrees.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby joe8d » Wed Aug 28, 2013 10:25 pm

baw703916 wrote:I've been saving as much as I'm allowed to for the last 10 years. If that's not enough there's not a lot I can do about it.

That was (IMO) a flaw in the article. It says things like "out of every $1000 you earn you will have to save $X." But it never addresses how much you are allowed to save.

Brad


One can always use tax efficent investments in a taxable account ( Broad Based Index Funds, Tax Exempt Bonds ) to save additional retirement money beyond the TD limits.
Last edited by joe8d on Wed Aug 28, 2013 10:31 pm, edited 1 time in total.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby downshiftme » Wed Aug 28, 2013 10:30 pm

I've been saving as much as I'm allowed to for the last 10 years. If that's not enough there's not a lot I can do about it.


I see this lots of times in retirement savings discussions, but I cannot make sense of it. Are people limiting their savings for retirement only to officially designated retirement accounts, IRA, 401k, 403b and the like? You can save as much as you want in ordinary accounts and use them for retirement if you wish. There is no externally imposed limit on retirement savings, only on tax-advantaged savings.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby assumer » Wed Aug 28, 2013 10:36 pm

baw703916 wrote:I've been saving as much as I'm allowed to for the last 10 years. If that's not enough there's not a lot I can do about it.

That was (IMO) a flaw in the article. It says things like "out of every $1000 you earn you will have to save $X." But it never addresses how much you are allowed to save.

Brad


What do you mean "allowed"? You're allowed to save as much as you want up to your net income...

If you mean tax-advantaged retirement accounts, saving for retirement in taxable accounts doesn't get you tax advantages, but you're still allowed to save it. If 401k's and IRA's were limited to $1k per year, that wouldn't mean people should only be saving $1k per year for retirement.

If you meant something else by "allowed", apologies 8-)
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby assumer » Wed Aug 28, 2013 10:39 pm

downshiftme wrote:
I've been saving as much as I'm allowed to for the last 10 years. If that's not enough there's not a lot I can do about it.


I see this lots of times in retirement savings discussions, but I cannot make sense of it. Are people limiting their savings for retirement only to officially designated retirement accounts, IRA, 401k, 403b and the like? You can save as much as you want in ordinary accounts and use them for retirement if you wish. There is no externally imposed limit on retirement savings, only on tax-advantaged savings.


You beat me to it and this bothers me as well. So what if your employer doesn't offer a 401k? So you don't get tax deferral? Do most people even understand what that means? Just because a company takes the money out of your paycheck for you after you fill out a form, that doesn't mean that's the amount you should save. That's simply the amount you pay less taxes on. People's lack of willpower to save themselves (pun :wink:) without somebody taking the money out of their paycheck for them (employer or gov't) is a major concern.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby baw703916 » Wed Aug 28, 2013 11:06 pm

Well, the article was specifically about 401k's. Certainly you can invest in taxable accounts in addition to retirement accounts (and I do). If the article had been titled "Why you are probably not saving enough for retirement" than that would be a different issue.

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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby nedsaid » Wed Aug 28, 2013 11:17 pm

There is a lot of denial out there. Many people are too preoccupied with today's problems to think about tomorrow.

I am not saving near the maximum limits for the workplace savings plan, but I am saving a lot and contribute to a Traditional IRA and a Roth IRA too. It is a good portion of my income.

Financial planners have run several projections for me, and so far I am A-OK.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby joe8d » Wed Aug 28, 2013 11:21 pm

Current allowable TA options limits ( 401k: 17.5 K , IRA : 5.5-6 K ) plus SS, all adjusted for inflation in the future, should provide a very comfortable retirement for all especially if funded to the max.Those with extravagant incomes and who want an extravagant lifestyle in retirement need save more in taxable accounts.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby umfundi » Thu Aug 29, 2013 3:53 am

As a side comment, if your employer does not offer a 401k, consider becoming a contractor (through your own LLC) and set up your own plan. You will become liable for the employer side of FICA, so factor that in the rate you negotiate with your employer.

In a state like MI (where I live) this is easy to do.

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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby tibbitts » Thu Aug 29, 2013 9:00 am

umfundi wrote:As a side comment, if your employer does not offer a 401k, consider becoming a contractor (through your own LLC) and set up your own plan. You will become liable for the employer side of FICA, so factor that in the rate you negotiate with your employer.

In a state like MI (where I live) this is easy to do.

Keith

It's not "easy" to do in any state for 99.9% of employees. Contractor vs. employee is defined by the relationship; you can't just decide to change from one to another without changing some fundamental properties of the relationship.

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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby umfundi » Thu Aug 29, 2013 9:13 am

tibbitts wrote:
umfundi wrote:As a side comment, if your employer does not offer a 401k, consider becoming a contractor (through your own LLC) and set up your own plan. You will become liable for the employer side of FICA, so factor that in the rate you negotiate with your employer.

In a state like MI (where I live) this is easy to do.

Keith

It's not "easy" to do in any state for 99.9% of employees. Contractor vs. employee is defined by the relationship; you can't just decide to change from one to another without changing some fundamental properties of the relationship.

Paul

I disagree. For me it was easy to get my employer to agree to pay me on a 1099 rather than a W2, and I have many friends who do the same. In SE Michigan (auto industry) this sort of arrangement is quite common.

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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby Gecko10x » Thu Aug 29, 2013 10:07 am

umfundi wrote:
tibbitts wrote:
umfundi wrote:As a side comment, if your employer does not offer a 401k, consider becoming a contractor (through your own LLC) and set up your own plan. You will become liable for the employer side of FICA, so factor that in the rate you negotiate with your employer.

In a state like MI (where I live) this is easy to do.

Keith

It's not "easy" to do in any state for 99.9% of employees. Contractor vs. employee is defined by the relationship; you can't just decide to change from one to another without changing some fundamental properties of the relationship.

Paul

I disagree. For me it was easy to get my employer to agree to pay me on a 1099 rather than a W2, and I have many friends who do the same. In SE Michigan (auto industry) this sort of arrangement is quite common.

Keith


I'm with Paul on this one. In the IRS documentation there is some gray area, but mostly the designation is defined by the relationship, not however you want to define it.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby dphmd » Thu Aug 29, 2013 10:16 am

Major Boglehead message in this article: "You can choose the best investments in the world but if you’re only putting $500 a year into your IRA or your 401(k) plan you're just not going to get there."

On the subject of "average 401k balance," that may more may not be relevant. I have my employee retirement savings spread over a 401k, a 403b, and a rollover IRA (in addition to my Roth and taxable accounts). Looking at them as separate accounts to get "average balance" would seriously underestimate the amount I have saved. Everyone else who has changed jobs with a 401k could be in a similar situation (unless the rollover all their funds to the new firm).
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby MoonOrb » Thu Aug 29, 2013 11:48 am

Paul is right. It may be "easy" to claim that you're a contractor, but there is a well-developed body of law that is used to determine whether you're a contractor or an employee. Just agreeing with the person you work for that you will be a contractor isn't determinative.

Keith's suggestion is a good one but it should be done bearing in mind the actual circumstances of the working relationship--in some cases contracting will be totally okay and in some it won't. If you have questions about it a tax lawyer or employment lawyer would be a good resource if this is a route you're considering going.
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Employee or Independent contractor?

Postby Taylor Larimore » Thu Aug 29, 2013 1:11 pm

It may be "easy" to claim that you're a contractor, but there is a well-developed body of law that is used to determine whether you're a contractor or an employee. Just agreeing with the person you work for that you will be a contractor isn't determinative.


The IRS has Form SS-8 to Determine Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding:

http://www.irs.gov/pub/irs-pdf/fss8.pdf

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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby umfundi » Thu Aug 29, 2013 1:23 pm

MoonOrb wrote:Paul is right. It may be "easy" to claim that you're a contractor, but there is a well-developed body of law that is used to determine whether you're a contractor or an employee. Just agreeing with the person you work for that you will be a contractor isn't determinative.

Keith's suggestion is a good one but it should be done bearing in mind the actual circumstances of the working relationship--in some cases contracting will be totally okay and in some it won't. If you have questions about it a tax lawyer or employment lawyer would be a good resource if this is a route you're considering going.

I expect that you will form an LLC ($25 in Michigan) and that your employer will agree to a contract with the LLC and put your compensation on a 1099 and that you will file a Schedule C. And, that there are "employee" benefits like health care that you will not be getting directly. So, you should negotiate a contractor rate with your employer.

I was assuming that if the employer does not have a 401k there are probably not many other benefits to worry about. By the way, if you do go this route there are ways to stash far more in tax advantaged accounts that the usual limits allow.

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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby technovelist » Thu Aug 29, 2013 2:25 pm

baw703916 wrote:I've been saving as much as I'm allowed to for the last 10 years. If that's not enough there's not a lot I can do about it.

That was (IMO) a flaw in the article. It says things like "out of every $1000 you earn you will have to save $X." But it never addresses how much you are allowed to save.

Brad


Never mind; I see a number of others have asked the question I had asked.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby downshiftme » Thu Aug 29, 2013 2:30 pm

Well, the article was specifically about 401k's. Certainly you can invest in taxable accounts in addition to retirement accounts (and I do). If the article had been titled "Why you are probably not saving enough for retirement" than that would be a different issue.


The article was NOT the source of the comment that "I am saving all I am allowed" so if it's not enough it wasn't my fault. That was a separate issue brought up here and in many other threads where people seem to limit themselves to thinking that retirement savings are only in officially designated retirement vehicles. The article suggested you should probably put more in your 401k.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby tibbitts » Thu Aug 29, 2013 8:31 pm

umfundi wrote:
MoonOrb wrote:Paul is right. It may be "easy" to claim that you're a contractor, but there is a well-developed body of law that is used to determine whether you're a contractor or an employee. Just agreeing with the person you work for that you will be a contractor isn't determinative.

Keith's suggestion is a good one but it should be done bearing in mind the actual circumstances of the working relationship--in some cases contracting will be totally okay and in some it won't. If you have questions about it a tax lawyer or employment lawyer would be a good resource if this is a route you're considering going.

I expect that you will form an LLC ($25 in Michigan) and that your employer will agree to a contract with the LLC and put your compensation on a 1099 and that you will file a Schedule C. And, that there are "employee" benefits like health care that you will not be getting directly. So, you should negotiate a contractor rate with your employer.

I was assuming that if the employer does not have a 401k there are probably not many other benefits to worry about. By the way, if you do go this route there are ways to stash far more in tax advantaged accounts that the usual limits allow.

Keith

The issue is that the vast majority of people work under very direct control of their employer, and that tends to disqualify them from being a contractor. They don't, for example, have a choice of when or where to accomplish their job, or with what equipment, or by using their choice of subcontractors.

For a couple of decades, I contracted with dozens of different companies and government entities, in various industries, sometimes as a sole proprietor, and sometimes as an LLC. But I also had to either pass on some opportunities, because I'd be offered W2 work, but specifically not contracting. In a few cases I was grandfathered in; subsequently; contractors weren't allowed to be direct contractors doing the exact work I was doing, even if masked by being their own LLC or S/C-corp. To contract, they had to become employees of one of a list of preferred contract providers, which were generally significantly large corporations. Every company deals with the regulations in different ways, and some are more willing to push the envelope than others. Some companies would work with a single-person S-corp or C-corp contractor, but not an LLC or sole proprietor. Some would mandate that you attend training from them, that you have to pay retail price for. Some would let you contract with them for six months, after which you couldn't contract with the company again for a specified period of weeks or months. Some would make you prove that you advertise your services to the public, and require you to provide a list of other recent clients. Some would not allow you to use their corporate travel services and negotiated rates, even though it resulted in them paying more for your business travel than they would otherwise have to. If you haven't run into any of this, your situation is the exception, not the rule.

Even assuming it's legally possible, in most cases the employer will only agree to contracting if it's to their advantage. That could relate to the ease of terminating a contractor vs. employee; it could mean paying less in rate than the cost of comparable wages plus benefits. So while anyone can try to negotiate anything, you can't count on getting more than you give in those negotiations.

Paul
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby umfundi » Thu Aug 29, 2013 10:24 pm

tibbitts wrote:
umfundi wrote:
MoonOrb wrote:Paul is right. It may be "easy" to claim that you're a contractor, but there is a well-developed body of law that is used to determine whether you're a contractor or an employee. Just agreeing with the person you work for that you will be a contractor isn't determinative.

Keith's suggestion is a good one but it should be done bearing in mind the actual circumstances of the working relationship--in some cases contracting will be totally okay and in some it won't. If you have questions about it a tax lawyer or employment lawyer would be a good resource if this is a route you're considering going.

I expect that you will form an LLC ($25 in Michigan) and that your employer will agree to a contract with the LLC and put your compensation on a 1099 and that you will file a Schedule C. And, that there are "employee" benefits like health care that you will not be getting directly. So, you should negotiate a contractor rate with your employer.

I was assuming that if the employer does not have a 401k there are probably not many other benefits to worry about. By the way, if you do go this route there are ways to stash far more in tax advantaged accounts that the usual limits allow.

Keith

The issue is that the vast majority of people work under very direct control of their employer, and that tends to disqualify them from being a contractor. They don't, for example, have a choice of when or where to accomplish their job, or with what equipment, or by using their choice of subcontractors.

For a couple of decades, I contracted with dozens of different companies and government entities, in various industries, sometimes as a sole proprietor, and sometimes as an LLC. But I also had to either pass on some opportunities, because I'd be offered W2 work, but specifically not contracting. In a few cases I was grandfathered in; subsequently; contractors weren't allowed to be direct contractors doing the exact work I was doing, even if masked by being their own LLC or S/C-corp. To contract, they had to become employees of one of a list of preferred contract providers, which were generally significantly large corporations. Every company deals with the regulations in different ways, and some are more willing to push the envelope than others. Some companies would work with a single-person S-corp or C-corp contractor, but not an LLC or sole proprietor. Some would mandate that you attend training from them, that you have to pay retail price for. Some would let you contract with them for six months, after which you couldn't contract with the company again for a specified period of weeks or months. Some would make you prove that you advertise your services to the public, and require you to provide a list of other recent clients. Some would not allow you to use their corporate travel services and negotiated rates, even though it resulted in them paying more for your business travel than they would otherwise have to. If you haven't run into any of this, your situation is the exception, not the rule.

Even assuming it's legally possible, in most cases the employer will only agree to contracting if it's to their advantage. That could relate to the ease of terminating a contractor vs. employee; it could mean paying less in rate than the cost of comparable wages plus benefits. So while anyone can try to negotiate anything, you can't count on getting more than you give in those negotiations.

Paul

Paul,

I remain unrepentant. Remember, we are starting from the class of employers who do not offer a 401k.

If they do not offer a 401k, I imagine they are are a small company that does not offer much in the way of other benefits, and are open or flexible to work conditions.

I am fully aware that you cannot cherry-pick work status to gain a tax advantage. However, I think it is reasonable to seek contractor status if your employer does not offer a tax-advantaged savings plan like a 401k.

Here in SE Michigan, this kind of employment status is very common among employers who wish to minimize fixed structural costs. That includes OEMs and especially Tier 1 and 2 suppliers.

Keith
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby nedsaid » Thu Aug 29, 2013 11:15 pm

Sometimes I really chafe when I read articles telling us how unprepared we are for retirement.

I have been saving for retirement pretty much since I have started working and I have been putting away substantial (for me) dollars into retirement accounts.

It seems whatever I do is just not enough. If I save 20%, I need to save 25%. If I save 25%, then I need Long Term Care Insurance. Having lots of money in regular 401k plans and traditional IRA's isn't enough. You need lots of money in Roth IRA's too. An oh, by the way, you need longevity insurance too.

I do wholeheartedly agree that most people are doing too little. But for us that are doing a lot, nothing ever seems to be enough. I can see why people get frustrated and want to forget the whole thing.

So we need to encourage and motivate people and not make the task so daunting that very few even will try.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby Grt2bOutdoors » Fri Aug 30, 2013 8:36 am

nedsaid wrote:Sometimes I really chafe when I read articles telling us how unprepared we are for retirement.

I have been saving for retirement pretty much since I have started working and I have been putting away substantial (for me) dollars into retirement accounts.

It seems whatever I do is just not enough. If I save 20%, I need to save 25%. If I save 25%, then I need Long Term Care Insurance. Having lots of money in regular 401k plans and traditional IRA's isn't enough. You need lots of money in Roth IRA's too. An oh, by the way, you need longevity insurance too.

I do wholeheartedly agree that most people are doing too little. But for us that are doing a lot, nothing ever seems to be enough. I can see why people get frustrated and want to forget the whole thing.

So we need to encourage and motivate people and not make the task so daunting that very few even will try.


+1

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Typical saver - spend one dollar, save a nickel
Typical Boglehead - spend 40 cents, save 55 cents, donate a nickel. :D
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby Texas hold em71 » Sat Aug 31, 2013 9:38 pm

Grt2bOutdoors wrote:
nedsaid wrote:Sometimes I really chafe when I read articles telling us how unprepared we are for retirement.

I have been saving for retirement pretty much since I have started working and I have been putting away substantial (for me) dollars into retirement accounts.

It seems whatever I do is just not enough. If I save 20%, I need to save 25%. If I save 25%, then I need Long Term Care Insurance. Having lots of money in regular 401k plans and traditional IRA's isn't enough. You need lots of money in Roth IRA's too. An oh, by the way, you need longevity insurance too.

I do wholeheartedly agree that most people are doing too little. But for us that are doing a lot, nothing ever seems to be enough. I can see why people get frustrated and want to forget the whole thing.

So we need to encourage and motivate people and not make the task so daunting that very few even will try.



+1

Typical consumer - spend one dollar, save one penny.
Typical saver - spend one dollar, save a nickel
Typical Boglehead - spend 40 cents, save 55 cents, donate a nickel. :D


+2
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby MathWizard » Sat Aug 31, 2013 9:57 pm

nedsaid wrote:Sometimes I really chafe when I read articles telling us how unprepared we are for retirement.

I have been saving for retirement pretty much since I have started working and I have been putting away substantial (for me) dollars into retirement accounts.

It seems whatever I do is just not enough. If I save 20%, I need to save 25%. If I save 25%, then I need Long Term Care Insurance. Having lots of money in regular 401k plans and traditional IRA's isn't enough. You need lots of money in Roth IRA's too. An oh, by the way, you need longevity insurance too.

I do wholeheartedly agree that most people are doing too little. But for us that are doing a lot, nothing ever seems to be enough. I can see why people get frustrated and want to forget the whole thing.

So we need to encourage and motivate people and not make the task so daunting that very few even will try.



I definitely agree. For couples with incomes
under $50K SS is likely to replace over 50%
of pre-retirement income. Under $100K
maybe 30% . So percentages of savings
of 50% are not required unless your retirement
expenses exceed your pre-retirement needs.
For those with very large incomes or
who earn a large salary for a short period
of time, then a large % would be needed.
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Re: "Why You Are Probably Not Saving Enough In Your 401k"

Postby ofcmetz » Sun Sep 01, 2013 3:04 pm

I think articles like this serve a good purpose. There should be more articles like this published more often. If they just reach a few people each time and get them to save a little more then they are worth it.

For Bogleheads these articles aren't as necessary. We are A B normal savers.
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