To Roth or not?

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mptfan
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Post by mptfan »

Mordoch wrote:
mptfan wrote: The thing is why all your examples can occur, its still is much more likely he will be at a higher tax bracket upon retirement. I'd say that would still probably be the case even with suffering from a job loss for instance. If he was in a higher tax bracket than 15% right now the decision would become more debatable, but at that level the odds should firmly strongly favor him being at a higher level upon retirement all things considered. The advice we're giving is based on a reasonable estimate of his future likely situation, he can ask for all the details on why to make this decision, (and he's effectively getting it if he reads all of this thread) but making suggestions on strong probabilities is generally the right call.
I have already cited statistics that show people spend less in retirement than when they are working, but you have cited no statistics to support your conclusion that the poster will be in a higher bracket. You can continue to hold any opinion you wish, but don't be surprised that someone challenges you when you offer no objective support for your opinion.
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Doc
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Do the math.

Post by Doc »

Murdoch and Mptfan are debating retirement spending and tax brackets. Even if the tax bracket is higher in retirement the ROTH could still be better if there is enough time for the funds to grow and if the student takes advantage of the extra (pre-tax) amount available in the ROTH.

Gentlemen, state your assumptions and do the math.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Mordoch
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Post by Mordoch »

mptfan wrote:I have already cited statistics that show people spend less in retirement than when they are working, but you have cited no statistics to support your conclusion that the poster will be in a higher bracket. You can continue to hold any opinion you wish, but don't be surprised that someone challenges you when you offer no objective support for your opinion.
Frankly point one has little relevance to the situation. People generally earn less money very early in their careers than later on, which also tends to mean they spend less at that point, so your basic point appears to be flawed. (Your number would factor in what he is spending later in life, and depending on the statistic it might actually compare what he spends right before retirement to right afterwards.)

Your other statistics are effectively almost irrelevant to this particular situation. You're simply refusing to use logic and acknowledge that young individuals who worry about saving at an early age, and who focus on a passive investment strategy with proper asset allocation in order to invest their money are certainly not typical in the United States. While we don't actually have the numbers from some study on this subject, all the evidence would suggest young investors concerned about these things who do in fact save their money early will do much better than the average American as far as ensuring they have allot of money for retirement is concerned. (A major problem is allot of Americans ignore the issue of retirement and avoid trying to save money for it at all until they are much older.) As noted I could actually look up how having a graduate degree increases the likely income he will earn in his lifetime from a statistical basis.

There is the old phrase "there are lies, damned lies, and statistics" and right now you are using those statistics in an improper manner to come to a flawed conclusion. It simply doesn't work once we have specific details like in this case to assess realistic probabilities and determine what will likely be his best option.
livesoft
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Post by livesoft »

Mordoch wrote:....
If he does in fact get a graduate degree I could even look up the precise statistics on how that raises the likely amount of money he will earn during his lifetime for instance. The reality is virtually anyone young who shows up on this board and expresses interest in saving money and how to invest it properly already is a self selected minority of the population so the statistics you have brought up are not very relevant.

The thing is why all your examples can occur, its still is much more likely he will be at a higher tax bracket upon retirement. I'd say that would still probably be the case even with suffering from a job loss for instance. If he was in a higher tax bracket than 15% right now the decision would become more debatable, but at that level the odds should firmly strongly favor him being at a higher level upon retirement all things considered. The advice we're giving is based on a reasonable estimate of his future likely situation, he can ask for all the details on why to make this decision, (and he's effectively getting it if he reads all of this thread) but making suggestions on strong probabilities is generally the right call.
I can identify with thealchemist because as a grad student, I put money into a tIRA. There were no Roth IRAs back then. I knew I was going to be in a lower tax bracket in the future, so that's the main reason why I did it. "Lower tax bracket than a grad student?!!! How is that possible?", you may well ask. I had a job overseas, so I knew I could exclude my income, withdraw my tIRA while in the 0% tax bracket, pay the 10% penalty and still come out ahead.

Now we are in a reasonably high tax bracket with a couple of 6-figure incomes in the household. But our expenses are low, so when we retire around age 50, we will drop to a very low tax bracket because we will be taxed only on dividends and long term capital gains. We may need some return of capital (which is not taxed) to meet our expenses. I can easily see how high income folks with graduate degrees are much more likely to be in a lower tax bracket than 15%. I gave examples in the other Roth IRA thread that was cited in this thread.

In the end, one should "run the numbers" for their own situation. I can create scenarios where the Roth IRA is a slam-dunk and I can create scenarios where the tIRA is a slam-dunk. I can even use the same family, where odd years make the Roth IRA better and even years make the tIRA better. Maybe that's why both sides of this equation can be and have been argued strongly.

BTW, I never did withdraw my IRA and it is still going strong. I will convert it to a Roth IRA when I stop working and am in a lower tax bracket than 15%.
livesoft
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Post by livesoft »

To give an idea of lower tax bracket for an early retiree family of 2 around age 50 years old with 2 kids still living at home. Suppose the family had $20K in qualified dividends and $70K in long term capitals for an AGI of $90K. We take the standard deduction. Our tax is just $3845 or 4.3% of our income. Only $5,200 of that income is in the 15% tax bracket.

[Edit] Ooops, I forgot to scroll down on the Form 1040 and missed the $2K of child tax credit. The tax would be only $1845 or less than 2.1% overall.
Last edited by livesoft on Sat Apr 14, 2007 2:35 pm, edited 1 time in total.
Mordoch
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Post by Mordoch »

livesoft wrote: I can easily see how high income folks with graduate degrees are much more likely to be in a lower tax bracket than 15%. I gave examples in the other Roth IRA thread that was cited in this thread.

In the end, one should "run the numbers" for their own situation. I can create scenarios where the Roth IRA is a slam-dunk and I can create scenarios where the tIRA is a slam-dunk. I can even use the same family, where odd years make the Roth IRA better and even years make the tIRA better. Maybe that's why both sides of this equation can be and have been argued strongly.
Frankly allot of your examples in the other thread seemed very badly flawed because you were looking at people right before retirement and then right afterwards. As noted those people often would only start getting social security later on, and medical costs among other things tend to get greater as people get older and further into retirement. (Requiring more money to be withdrawn to pay for it.) Its also true the average American does a lousy job of savings enough money for retirement, which often has a great deal to do with them staying in a low tax bracket. As has also been noted, there is also a strong possibility of increased tax rates in general in the future, which also shifts things in a Roth IRA's favor. This is before we even touch the greater flexibility issues with a Roth IRA.

Basically we didn't get any information suggesting he is in a situation where a tIRA is likely to be better, so I really can feel confident in advocating the Roth IRA for him right now. We can't say with certainty it will end up best for him, but the odds certainly are in favor of this being the case given what we know at the moment.
mptfan
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Post by mptfan »

Quote from Mordoch: "You're simply refusing to use logic and acknowledge that young individuals who worry about saving at an early age, and who focus on a passive investment strategy with proper asset allocation in order to invest their money are certainly not typical in the United States. While we don't actually have the numbers from some study on this subject, all the evidence would suggest young investors concerned about these things who do in fact save their money early will do much better than the average American as far as ensuring they have allot of money for retirement is concerned. (A major problem is allot of Americans ignore the issue of retirement and avoid trying to save money for it at all until they are much older.) As noted I could actually look up how having a graduate degree increases the likely income he will earn in his lifetime from a statistical basis."

I think this is probably the third or fourth time you have ignored the same point....it doesn't matter how much money he earns while he is working...it only matters how much income he has in retirement. Try and read that sentence again please.

I agree that the poster will likely be better of financially than most Americans. But that doesn't change the fact that he will likely spend less in retirement than when he is working. The statistics I have cited prove that.
Last edited by mptfan on Sat Apr 14, 2007 2:10 pm, edited 1 time in total.
mptfan
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Post by mptfan »

Mordoch wrote: Its also true the average American does a lousy job of savings enough money for retirement, which often has a great deal to do with them staying in a low tax bracket.
You continue to make statements that have no support, and this statement is directly contradicted by the study I cited from the Journal of Financial Planning:

http://www.fpanet.org/journal/articles/ ... 5-art7.cfm

Here is a quote from the study which directly contradicts your assertion:

"The paper analyzes the Consumer Expenditure Survey data to determine whether people are spending less voluntarily as they age or out of financial necessity or generational differences. The conclusion is that reduced spending is voluntary."
Mordoch
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Post by Mordoch »

mptfan wrote: I think this is probably the third or fourth time you have ignored the same point....it doesn't matter how much money he earns while he is working...it only matters how much income he has in retirement. Try and read that sentence again please.

I agree that the poster will likely be better of financially than most Americans. But that doesn't change the fact that he will likely spend less in retirement than when he is working. The statistics I have cited prove that.
THAT'S ALMOST AN UTTERLY POINTLESS DETAIL FOR HIM RIGHT NOW.

While this may be distorted by him being in graduate school right now and possibly having tuition expenses, other than that he's probably at the lowest point in his life with regards to how much he will spend per year during his professional career. When you're not earning much money you tend to really watch every dollar, while you start indulging more once you have a greater income, and tend to get used to certain finer things in life at that point.

Basically to summarize, he will likely be spending far more later in his career, (statistics would show this if you bother to check) and still be spending significant more than he is now in retirement even if there is a decrease from the last years before he retires. In other words the statistic you're bring up in no way shows or suggests why he should not invest in a Roth IRA as a 25 year old.
mptfan
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Post by mptfan »

Mordoch wrote:
mptfan wrote: I think this is probably the third or fourth time you have ignored the same point....it doesn't matter how much money he earns while he is working...it only matters how much income he has in retirement. Try and read that sentence again please.

I agree that the poster will likely be better of financially than most Americans. But that doesn't change the fact that he will likely spend less in retirement than when he is working. The statistics I have cited prove that.
THAT'S ALMOST AN UTTERLY POINTLESS DETAIL FOR HIM RIGHT NOW.

While this may be distorted by him being in graduate school right now and possibly having tuition expenses, other than that he's probably at the lowest point in his life with regards to how much he will spend per year during his professional career. When you're not earning much money you tend to really watch every dollar, while you start indulging more once you have a greater income, and tend to get used to certain finer things in life at that point.

Basically to summarize, he will likely be spending far more later in his career, (statistics would show this if you bother to check) and still be spending significant more than he is now in retirement even if there is a decrease from the last years before he retires. In other words the statistic you're bring up in no way shows or suggests why he should not invest in a Roth IRA as a 25 year old.
Mordoch, instead of saying over and over again how you could cite a statistic, or suggesting that I look it up, why don't you try actually citing real studies or real statitistics to support your statements. I'm tired of debunking them for you.
Mordoch
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Post by Mordoch »

mptfan wrote:
Mordoch wrote: Its also true the average American does a lousy job of savings enough money for retirement, which often has a great deal to do with them staying in a low tax bracket.
You continue to make statements that have no support, and this statement is directly contradicted by the study I cited from the Journal of Financial Planning:

http://www.fpanet.org/journal/articles/ ... 5-art7.cfm
Frankly its hard to take a study seriously when it basically argues that the problem facing most Americans is they are saving too much, which is definitely what the author of that paper argues effectively in this case and in other articles.

The argument that everyone reduces spending voluntarily is simply bogus.
mptfan
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Post by mptfan »

Mordoch, part of your problem is you equate income with spending. You need to understand that they are two different things, and that some people (especially Diehards) actually spend quite a bit less than they earn. So the fact that someone earns a high income during their working years does not mean that they will spend an equally high amount in retirement.

You will find that the Diehard group is an especially thrifty bunch when it comes to keeping spending under control. Maybe you should read the book "the Millionare Next Door." That will give you a good idea of how most Diehards are when it comes to spending.
mptfan
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Post by mptfan »

Mordoch wrote:
mptfan wrote:
Mordoch wrote: Its also true the average American does a lousy job of savings enough money for retirement, which often has a great deal to do with them staying in a low tax bracket.
You continue to make statements that have no support, and this statement is directly contradicted by the study I cited from the Journal of Financial Planning:

http://www.fpanet.org/journal/articles/ ... 5-art7.cfm
Frankly its hard to take a study seriously when it basically argues that the problem facing most Americans is they are saving too much, which is definitely what the author of that paper argues effectively in this case and in other articles.

The argument that everyone reduces spending voluntarily is simply bogus.
Its getting really tiring to debunk your assertions which you continually make with no support, but here goes:

Neither I nor the study suggested that "everyone" reduces spending voluntarily during retirement.

If you want to attack a statement that I have supported with a major study, fine, but please offer me more than simply the fact that you disagree. Otherwise, your opinion lacks merit.
mptfan
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Post by mptfan »

Here is another survey that supports my position that most people don't spend enough to get into the higher tax brackets. This survey includes responses from working people and retired people:

http://early-retirement.org/forums/inde ... ic=12138.0

Approximately 75 percent of the people responding to that poll spent less than 75k in 2006.

(Notice that the poll asked for how much people SPENT, not how much they EARNED)
hwhuang
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Post by hwhuang »

Easily Roth. Like others have said,

1. Contribute up to company match (401k, 403b, etc), if available.
2. Max out Roth IRA.
3. Max out annual limit for 401k/403b
4. Invest in taxable.

Props to you for getting started early. Max out the Roth if possible and take advantage of your initial low tax bracket.
Last edited by hwhuang on Sat Apr 14, 2007 2:49 pm, edited 1 time in total.
livesoft
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Post by livesoft »

Mordoch wrote:Frankly allot of your examples in the other thread seemed very badly flawed because you were looking at people right before retirement and then right afterwards.
Whatever. I am giving real-life numbers for someone that I have been around for 50 years. I guess I am very badly flawed because I did overstate the taxes in the example above by 100%. Sorry about that, but I have made a correction.
Mordoch
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Post by Mordoch »

mptfan wrote: Its getting really tiring to debunk your assertions which you continually make with no support, but here goes:

Neither I nor the study suggested that "everyone" reduces spending voluntarily during retirement.

If you want to attack a statement that I have supported with a major study, fine, but please offer me more than simply the fact that you disagree. Otherwise, your opinion lacks merit.
He certainly implies this was the ordinary situation with the following quote.
Research conducted by Tacchino and Saltzman indicates that those 75 and over spend less than 65- to 74-year-olds, despite maintaining similar levels of income. Ultimately, this information would imply that lower spending happens voluntarily rather than out of necessity.
http://www.fpanet.org/journal/articles/ ... 5-art7.cfm

However here's a more recent article rebutting the claim.
Since it appeared, Mr. Bernicke's study has been discussed in a host of magazines and newspapers, including The Wall Street Journal. "Financial planner to retirees: Loosen up," trumpeted one newspaper headline. "Are you saving too much for retirement?" asked another newspaper.

Saving too much? Trust me: For most of us, that just isn't a risk.

Getting squeezed. Yes, we do spend less later in retirement. According to a 2005 study put out by the Urban Institute in Washington, folks age 75 and older typically spend 10 percent less per person than those age 65 to 74.

But this drop in spending doesn't seem to be entirely voluntary. To prove that older retirees are wealthier, Mr. Bernicke's study cites 2000 U.S. Census Bureau data for five income quintiles.

At first glance, the results appear to show Americans getting richer as they grow older. Take households that fall into the bottom 20 percent of income: The typical net worth is $32,000 for those age 65 to 69, $43,230 for those 70 to 74 and $46,266 for those 75 and older.

Trouble is, the data are distorted because of the way the quintiles are created. You might presume that 20 percent of each age group falls into each quintile and thus you're getting an apples-to-apples comparison. But in fact, the income cutoff for these quintiles is based on the range of income for the entire population.

In other words, no matter what your age, you will be listed as falling into the bottom quintile if your annual income is $15,648 or below. Result: 43 percent of households age 75 and up find themselves in the bottom 20 percent of income, versus 31 percent of those 70 to 74 and 27 percent of those 65 to 69. It just isn't valid to compare the median wealth for these odd-size slices of the population.

When I brought this to Mr. Bernicke's attention, he acknowledged the problem. "The way (the Census data are) published is extremely confusing," he says, adding that he plans to research the issue further.

Where does that leave us? Fortunately, the Census Bureau also lists the median wealth for all households in each age group. And that shows that households headed by someone age 75 and older aren't richer. These seniors have a typical household net worth of $100,100, versus $120,000 for those 70 to 74 and $114,050 for those 65 to 69.

Moreover, for seniors - especially those age 75 and up - home equity is a huge part of their net worth. If you ignore home equity, households headed by someone age 75 and older have a typical net worth of just $19,025.

The reality: Most older Americans don't have much financial room for maneuver - and if they're spending less, it probably isn't out of choice.

"The question shouldn't be, 'Do older retirees spend less?'" says Henry Hebeler, a retired Boeing executive who runs www.analyzenow.com, a Web site devoted to retirement issues. "The question should be, 'Why do retirees spend less?' They spend less because they don't have the money."
http://accounting.smartpros.com/x54292.xml

In other words the study you're citing is highly deceptive.
Mordoch
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Post by Mordoch »

mptfan wrote:Mordoch, part of your problem is you equate income with spending. You need to understand that they are two different things, and that some people (especially Diehards) actually spend quite a bit less than they earn. So the fact that someone earns a high income during their working years does not mean that they will spend an equally high amount in retirement.

You will find that the Diehard group is an especially thrifty bunch when it comes to keeping spending under control. Maybe you should read the book "the Millionare Next Door." That will give you a good idea of how most Diehards are when it comes to spending.
You're still not really making your case at all. If you're thrifty you generally spend extremely little when you're not making much money, and still spend a fair amount more when you're in better shape income wise. There are exceptions, but those are extremely rare. Most people don't see the point of suffering if they can spend somewhat more to be more comfortable while still saving a huge chunk of their income. (For the record there is a point where you do clearly cross into overkill with your savings percentage unless you intend to retire quite early. Admittedly if you plan to do this your calculations can change, but otherwise you should be considering a more conventional retirement scenario.)
mptfan
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Post by mptfan »

Congratulations, you finally cited a study!

So now we have two conflicting studies that come to conflicting conclusions regarding the CAUSE of reduced spending in retirement. In any event, we can agree that some reduce spending out of necessity, and others, out of choice. Most on this board probably do so by choice, given the fact that Diehards generally save a very high percentage of their income while working. It stands to reason, therefore, that Diehards spend less than they make while working and live well below their means, so that their income in retirement drops by choice. If the poster follows the Diehard philosophy, then my advice is likely to be appropriate for his situation.
mptfan
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Post by mptfan »

Mordoch wrote:If you're thrifty you generally spend extremely little when you're not making much money, and still spend a fair amount more when you're in better shape income wise. There are exceptions, but those are extremely rare.
:shock: Extremely rare?? You need to look around you and get to know the Diehards on this board.

Take a look at the recent thread called "How much do you save" or a similar title. I recall that the average Diehard saves around 30 percent of their gross income, and some save even more. You need to really get better informed about the relationship between income and spending among the Diehards.
Mordoch
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Post by Mordoch »

mptfan wrote: It stands to reason, therefore, that Diehards spend less than they make while working and live well below their means, so that their income in retirement drops by choice. If the poster follows the Diehard philosophy, then my advice is likely to be appropriate for his situation.
Your argument is blatantly flawed though because the Diehards are a minority of the population. (Or if this is not the case you better explain while all the evidence suggests we tend to be a rather small minority.) Since the Diehards are merely part of the average, if we actually maintain a similar or even higher level of spending as we age it won't necessarily show up in the statistics and could more than be countered by everyone else.

We'd need a study accurately separating out people into separate categories in order to see if what you are asserting has any merit. The evidence that with a substantial portion of the population the decision is involuntary suggests the data tends to at least exaggerate how much spending drops as you get older if you have enough money.
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Post by Doc »

hwhuang wrote:Easily Roth. Like others have said,

1. Contribute up to company match (401k, 403b, etc), if available.
2. Max out Roth IRA.
3. Max out annual limit for 401k/403b
4. Invest in taxable.

Props to you for getting started early. Max out the Roth if possible and take advantage of your initial low tax bracket.
"2. Max out ROTH IRA"

and

"Max out the Roth if possible and take advantage of your initial low tax bracket."

That is the issue that is the subject of the debate. If you are in the "initial low tax bracket" you do one thing but if your are in a later high tax bracket you might want to do the other.

You just can't make a generalized statement like "2. Max out ROTH IRA" without having a lot more information.

Making generalized statements on the results of discounted cash flow analysis with limited information is in my opinion a dangerous way to make lifetime investment decisions.

Murdock and Mptfan have been "discussing" whether tax rates in retirement are likely to be higher or lower. At least I think that's what they are discussing. :)
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Mordoch
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Post by Mordoch »

mptfan wrote: :shock: Extremely rare?? You need to look around you and get to know the Diehards on this board.

Take a look at the recent thread called "How much do you save" or a similar title. I recall that the average Diehard saves around 30 percent of their gross income, and some save even more. You need to really get better informed about the relationship between income and spending among the Diehards.
You don't seem to get it. I'm talking about a hypothetical where you might save around 50% of your income or more of your income and really tend to live fairly miserably. Most people don't go quite that far and spend more money once they are making allot more. In order words you might go from being outright miserly to reasonably frugal.

Edit: I suspect the "how much do you save" thread would tend to attract the people who tend to go to extremes even among those who visit this board, so the stats are somewhat misleading even for Diehards. (It would represent a place where you can effectively brag in public about how much you currently save.) The other thing is people who permanently hang out on this board and tend to vote more in that kind of poll are probably more likely to be the really obsessive savers, while the thread starter may be simply a conscientious individual who may not visit that often once he figures out his savings plan. (There's absolutely nothing wrong with that and some of us probably do obsess about some details too much, at least if we're not involved with a career in financial planning.)
Last edited by Mordoch on Sat Apr 14, 2007 3:10 pm, edited 1 time in total.
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nick22
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Yawn

Post by nick22 »

Is the world really this black and white? You guys must be engineers, lawyers, or really bored but like livesoft said, you can create an artificial scenerio for any of these IRA arguements to justify your beliefs. You have no idea what the future tax rates will be, making all of this subjective and nothing more than speculation. Every investor will make his/her own decision on the issue and it will not likely come down to a math equation. I use the Roth, but not based on math. I like the lack of RMDs at 70.5, passing it on to heirs at a stepped up cost basis, and it is a hedge against a significant increase in future tax rates to give me tax flexibility.
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Jackson
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Post by Jackson »

This is my first post, so I thought I would jump in on such a fun thread.

There is a lot of, umm, discussion due to the uncertainty of 1) future tax rates, 2) future income levels, and 3) likely spending levels.

My view is to do what is advised for investing in general: diversify. I contribute to a Roth when possible and contribute to 401ks otherwise. This way I have some diversification regarding future tax increases. I'm not sure what my income will be when I retire, but either way I'll have some money in a Roth and some in tax deferred accounts.
mptfan
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Post by mptfan »

Mordoch wrote:
mptfan wrote: It stands to reason, therefore, that Diehards spend less than they make while working and live well below their means, so that their income in retirement drops by choice. If the poster follows the Diehard philosophy, then my advice is likely to be appropriate for his situation.
Your argument is blatantly flawed though because the Diehards are a minority of the population. (Or if this is not the case you better explain while all the evidence suggests we tend to be a rather small minority.) Since the Diehards are merely part of the average, if we actually maintain a similar or even higher level of spending as we age it won't necessarily show up in the statistics and could more than be countered by everyone else.
I don't get it?? You are being a complete hipocryte! Earlier you said that the poster was in the minority of the population that will likely save a lot because he is posting on here, and because he is getting a graduate degree, and therefore, we should consider that. NOW, to attack my argument, you suggest that my argument is flawed because Diehards are in the minority???? You want to consider his minority status to support YOUR argument, but you attack my argument by pointing out that it only applies to Diehards?? In fairness, shouldn't you give me the same consideration??
mptfan
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Post by mptfan »

Mordoch wrote:
mptfan wrote: :shock: Extremely rare?? You need to look around you and get to know the Diehards on this board.

Take a look at the recent thread called "How much do you save" or a similar title. I recall that the average Diehard saves around 30 percent of their gross income, and some save even more. You need to really get better informed about the relationship between income and spending among the Diehards.
You don't seem to get it. I'm talking about a hypothetical where you might save around 50% of your income or more of your income and really tend to live fairly miserably. Most people don't go quite that far and spend more money once they are making allot more. In order words you might go from being outright miserly to reasonably frugal.
Mordoch, if I make 150k a year, and I spend 75k a year (50%), am I living "fairly miserably"??
Mordoch
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Post by Mordoch »

mptfan wrote: I don't get it?? You are being a complete hipocryte! Earlier you said that the poster was in the minority of the population that will likely save a lot because he is posting on here, and because he is getting a graduate degree, and therefore, we should consider that. NOW, to attack my argument, you suggest that my argument is flawed because Diehards are in the minority???? You want to consider his minority status to support YOUR argument, but you attack my argument by pointing out that it only applies to Diehards?? In fairness, shouldn't you give me the same consideration??
Uh, there isn't any hypocrisy here at all.

Posting here and expressing his concerns at his age to some degree MAKES him a minority, along with also apparently being about to obtain a graduate degree. (Its a good minority to be in for the record.) In both his situation and how the Diehard situation works, being a minority invalidates the usefulness of general statistics that basically give averages that factor in the rest of the population, so my argument is completely consistent on my end.
Last edited by Mordoch on Sat Apr 14, 2007 3:49 pm, edited 3 times in total.
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Post by Mordoch »

mptfan wrote: Mordoch, if I make 150k a year, and I spend 75k a year (50%), am I living "fairly miserably"??
No, but the question is how typical this actually is. (Although in an area with really high housing costs and living expenses it could be less pleasant) Even among those who answered the poll question only so many actually were saving 50% (although its a bit tricky to say for sure since the cutoff between categories is 50%.) There are also likely a few people with high savings numbers that are mostly being forced into that because they didn't do a good job of saving at all earlier in their career and have to do so now to retire at a reasonable age with enough money to get by. On top of that you have the self selecting distortion factors I talked about previously. (On top of everything else I mentioned, some of those who are doing a lousy job of saving at the moment probably are inclined to skip the thread since it will just make them feel guilty and depressed.)

Ultimately if the poster believes he will be an extreme super saver your arguments for a tax deferred option may make more sense, but otherwise its not so convincing.
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The real reason for the advice

Post by grabiner »

The real reason for the standard advice (max out a Roth IRA before adding unmatched funds to your 401(k)) has not been discussed at all on this thread.

Anyone can open a Roth IRA with a 0.20% expense ratio in a variety of Vanguard funds, and it may even drop to 0.10% after ten years and Admiral status. Relatively few people can invest in a 401(k) at that low an expense ratio, and even those who have some funds with that expense ratio may have other options which are only available at higher costs or not at all.

If your 401(k) charges 0.70% expenses (and that's fairly low), and you spend 20 years with your employer and then roll it into an IRA, you'll lose 10% of your investment to extra expenses even before you pay taxes, so it's better to invest in an IRA at a lower cost before maxing out your 401(k).

If you work for the US government and have a 0.05% expense ratio on your TSP (the government's 401(k) equivalent), and it has the investment options you want, it's reasonable to max out your TSP before your IRA, unless you are in a lower tax bracket now than you expect to be in at retirement. (Young Government employees may expect to be in a higher tax bracket at retirement, because they will have a taxable pension, and may take the TSP benefits as an annuity.)
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Post by mptfan »

Mordoch wrote:
mptfan wrote:
Ultimately if the poster believes he will be an extreme super saver your arguments for a tax deferred option may make more sense, but otherwise its not so convincing.
You started this thread by saying that I gave "flat out bad advice." Now, you are saying that my advice "may make more sense" if the poster is a super saver. Since you don't know enough information about the poster's savings habits, it was unfair to criticize my advice.
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Post by Mordoch »

mptfan wrote: You started this thread by saying that I gave "flat out bad advice." Now, you are saying that my advice "may make more sense" if the poster is a super saver. Since you don't know enough information about the poster's savings habits, it was unfair to criticize my advice.
I may have not been clear enough. I view it as highly unlikely that the poster knows he is that much of an extreme super saver right now. I'd contend this still is pretty rare, and even rarer that its done without the saver suffering any discomfort from doing so. (I'd say there are probably are number of cases on here where the people are overdoing the savings more than really makes sense, or they are clearly deliberately aiming to give lots of money to their heirs in which case allot of money in a Roth IRA is great, which is a possibility you may have neglected.) Ultimately this falls under the category of rather improbable reasons the tax deferred option would be better.

Basically I view your advice as still extremely questionable, especially because the reality is allot of people like the idea of leaving a nice amount of money to their heirs, and a Roth IRA helps avoid all of the tax consequences of doing this otherwise. Your justifications would rarely apply to someone in his precise position, but you didn't clarify why you advocated a tIRA until prodded, and you never actually addressed the issue that most 401K plans have expense ratio issues, but just referred to tax deferred plans in general. (I did cover that issue to a degree in an early post.)

Edit: In fact looking over your original post again, you clearly suggested ANY tax deferred plan first, that's indisputably bad advice since if the poster did have a 401K plan (we didn't know at the time) with a bad enough expense ratio for all his options, that could more than overcome any benefit from opting for that first if he stays with the job for awhile, and you didn't even clarify you were suggesting a tIRA over a Roth if an option. Of course on top of that sufficiently lousy 401K plan options can hurt your returns beyond merely its expense ratio.
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Post by mptfan »

Mordoch wrote: I view it as highly unlikely that the poster knows he is that much of an extreme super saver right now. I'd contend this still is pretty rare, and even rarer that its done without the saver suffering any discomfort from doing so. (I'd say there are probably are number of cases on here where the people are overdoing the savings more than really makes sense, or they are clearly deliberately aiming to give lots of money to their heirs in which case allot of money in a Roth IRA is great, which is a possibility you may have neglected.) Ultimately this falls under the category of rather improbable reasons the tax deferred option would be better.
I think you need to re-evaluate your views on this matter. The fact is that most Diehards are supersavers WITHOUT SUFFERING DISCOMFORT FROM DOING SO. Thus, the link between earnings and spending is not as strong as you think.

A hypothetical diehard may earn 100k during their accumulation years, and save 30k, pay 20k in taxes, and spend 50k. So when this hypothetical diehard retires, he or she instantly drops to a lower tax bracket to maintain the same standard of living (because they no longer have to save, and the payroll taxes go away, and the income taxes are much lower). This is also consistent with the responses to a poll on the early retirement forum:

http://early-retirement.org/forums/inde ... ic=11650.0

In that poll, 59% of the retired respondents SPENT LESS THAN 50% of their pre-retirement income in retirement. This poll may represent a minority of the overall population, but the fact remains that there are people who live below their means and therefore will be able to maintain their standard of living in retirement even though their reported income (and thus their marginal tax bracket) will drop dramatically in retirement.
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Post by mptfan »

Mordoch wrote: Basically I view your advice as still extremely questionable, especially because the reality is allot of people like the idea of leaving a nice amount of money to their heirs, and a Roth IRA helps avoid all of the tax consequences of doing this otherwise.
Do you know whether the poster likes the idea of leaving a "nice amount of money to his heirs"?? If the answer is no, then you shouldn't use it as a justification for recommending a Roth.

The bottom line is that there are good reasons to consider a Roth before investing in pretax plans, and there are good reasons to consider pretax plans before investing in a Roth, and it depends on each person's situation and their goals and objectives. Would you at least agree with that statement?
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Post by Mordoch »

mptfan wrote: Do you know whether the poster likes the idea of leaving a "nice amount of money to his heirs"??...

The bottom line is that there are good reasons to consider a Roth before investing in pretax plans, and there are good reasons to consider pretax plans before investing in a Roth, and it depends on each person's situation and their goals and objectives. Would you at least agree with that statement?
What you're ignoring is your situation is incredibly rare. Most people saving like crazy justify it to some degree because they like the idea of some of their money going to their children. If you don't care about your heirs, then you want to calculate it so you spend at least most of your money while alive which tends to mean a higher spending rate.

Basically you need to be allot more careful about how you give advice because it was simply inappropriate as given without clarifying the situations in which it might make sense. (You proceeded to mention allot of reasons that indisputably didn't apply to his situation at all initially when asked.) In fact the way your first post was written you basically suggested he should go for a 401K plan first and the Roth IRA plan second. Since you already knew his income was low enough to qualify for a tIRA, the logical conclusion was you were advocating a 401K plan without matching funds over an IRA plan period which I do think was another element of why I reacted the way I did. Obviously suggesting such a thing without even mentioning possible issues with a 401K plan and high expense ratios is clearly bad advice.
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Post by mptfan »

Mordoch wrote:
mptfan wrote: Do you know whether the poster likes the idea of leaving a "nice amount of money to his heirs"??...

The bottom line is that there are good reasons to consider a Roth before investing in pretax plans, and there are good reasons to consider pretax plans before investing in a Roth, and it depends on each person's situation and their goals and objectives. Would you at least agree with that statement?
What you're ignoring is your situation is incredibly rare. Most people saving like crazy justify it to some degree because they like the idea of some of their money going to their children. If you don't care about your heirs, then you want to calculate it so you spend at least most of your money while alive which tends to mean a higher spending rate.

Basically you need to be allot more careful about how you give advice because it was simply inappropriate as given without clarifying the situations in which it might make sense. (You proceeded to mention allot of reasons that indisputably didn't apply to his situation at all initially when asked.) In fact the way your first post was written you basically suggested he should go for a 401K plan first and the Roth IRA plan second. Since you already knew his income was low enough to qualify for a tIRA, the logical conclusion was you were advocating a 401K plan without matching funds over an IRA plan period which I do think was another element of why I reacted the way I did. Obviously suggesting such a thing without even mentioning possible issues with a 401K plan and high expense ratios is clearly bad advice.
I give up. You are hopeless. I do not agree that my reasons "indisputably didn't apply to his situation." I think they do, and I have proven that. The fact that you think they don't apply doesn't mean that it is undisputed.

Also, I did not advocate a 401k plan. In fact I never used those words. Here is what I said:
"I think you should follow the following order: 1. Defer the maximum that you can in any pretax plan you have access to. 2. Fully fund a Roth, if eligible. 3. Invest in taxable accounts." As you can see, I advocated "defering the maximum that you can in any pretax plan you have access to." That would include a deductible IRA.
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Post by Mordoch »

mptfan wrote: "I think you should follow the following order: 1. Defer the maximum that you can in any pretax plan you have access to. 2. Fully fund a Roth, if eligible. 3. Invest in taxable accounts." As you can see, I advocated "defering the maximum that you can in any pretax plan you have access to." That would include a deductible IRA.
You need to watch your language choices in the future because you definitely came across as potentially giving that impression. Since you were addressing his specific situation, he obviously was eligible for a tIRA and therefore he shouldn't be contributing to a Roth IRA at all if he went for your second option. That definitely could leave people with the impression you were simply talking about a 401K, especially with a poster who is just getting started with investing and may not be familiar with all his options.

By the way, you certainly did bring up reasons irrelevant to his situation such as.

"By contributing to tax deferred plans, I can reduce my current AGI down to below the threshold at which I can fully take advantage of certain tax credits, such as the child tax credit."

You were supposed to be covering why he should be considering a tIRA, and that clearly didn't apply to him and could potentially just confuse him.
Last edited by Mordoch on Sat Apr 14, 2007 7:01 pm, edited 1 time in total.
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Post by mptfan »

You said: "Most people saving like crazy justify it to some degree because they like the idea of some of their money going to their children. If you don't care about your heirs, then you want to calculate it so you spend at least most of your money while alive which tends to mean a higher spending rate."

This is utter nonsense. First, how do you know why people save? Did you ask all of them? Your penchant for assumptions is beyond my ability to debunk them.

Second, not caring about your heirs has nothing to do with your spending rate. That is determined by how long you want your money to last.. which, by the way, is unrelated to how long you will actually live. (no one knows the date they will die)
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Post by Mordoch »

mptfan wrote:Second, not caring about your heirs has nothing to do with your spending rate. That is determined by how long you want your money to last.. which, by the way, is unrelated to how long you will actually live. (no one knows the date they will die)
While true in a respect, you can definitely try to calculate things roughly, and obviously there isn't any point in making sure the money will last until you're 150 at the rate you're spending it. Furthermore intermediate annuities start to become an attractive option if you don't care about heirs but want to make sure you don't actually run out of an income stream.
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Post by mptfan »

Mordoch wrote:
mptfan wrote: "I think you should follow the following order: 1. Defer the maximum that you can in any pretax plan you have access to. 2. Fully fund a Roth, if eligible. 3. Invest in taxable accounts." As you can see, I advocated "defering the maximum that you can in any pretax plan you have access to." That would include a deductible IRA.
You need to watch your language choices in the future because you definitely came across as potentially giving that impression. Since you were addressing his specific situation, he obviously was eligible for a tIRA and therefore he shouldn't be contributing to a Roth IRA at all if he went for you second option. That definitely could leave people with the impression you were simply talking about a 401K, especially with a poster who is just getting started with investing and may not be familiar with all his options.

By the way, you certainly did bring up reasons irrelevant to his situation such as.

"By contributing to tax deferred plans, I can reduce my current AGI down to below the threshold at which I can fully take advantage of certain tax credits, such as the child tax credit."

You were supposed to be covering why he should be considering a tIRA, and that clearly didn't apply to him and could potentially just confuse him.
I know I said I would give up debunking your assumptions, but here goes again:

How in the world did I "potentially give the impression" that I was advocating a 401k?? You really need to go to a "assumptions anonymous" meeting.

Second, how do you know that he is not eligible for tax credits???? What about the retirement saver's tax credit? The earned income tax credit?? Is he at or near the threshold where he could be eligible for more credits if he reduced his AGI?? Geez, you really are something with all your assumptions.
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Post by Mordoch »

mptfan wrote: How in the world did I "potentially give the impression" that I was advocating a 401k?? You really need to go to a "assumptions anonymous" meeting.
You clearly gave that exact impression. Since there was no logical reason to mention a Roth IRA as a second step given you knew at that point his income level was low enough to qualify for a tIRA, an obvious possible conclusion would be that you were solely advocating a 401K plan and then a Roth IRA. Someone without comprehensive knowledge could not only interpret it that way but assume it makes complete sense as an investment strategy. (For the record it probably would make sense with the Thrift Savings Plan as your 401K option.) Failing to address 401K expense ratio issues is also a problem because they can actually be so bad in some extreme cases that you're better off in a taxable account than suffering with extremely high ERs for a really lengthy period of time.
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Post by Alex Frakt »

(puts on Mod hat)

C'mon folks. Can we tone things down a bit? At this point we're not really adding anything substantive, everyone is clear that these questions rely on multiple factors, some unknowable - e.g. future tax rates - and many specific to each individual's situation.

So how about getting clarifications from a questioner where possible and stating our assumptions where it's not, and letting everyone make up their own minds which advice (or combination of advice) best fits their situation.

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If total taxable wealth > IRA value then Roth

Post by RmanB17499 »

If total taxable wealth > IRA value
and if you can have the Roth IRA for 5+ years
and if ROI on non-IRA investments > ROI on IRA investments
then go with the Roth IRA

12/31/2007
Neighbor A. 742 Evergreen Terr, Simpsons.
Capital gain in home, after any and all exclusions = $50,000
Roth IRA contribution = $4,000
Roth IRA value = $4,000
Total net worth = $54,000, just like the Flanders.

Neighbor B. 740 Evergreen Terr, Flanders.
Capitain gain in home, after any and all exclusions = $50,000
TIRA Contribution = $4,000
TIRA portfolio value = $4,000
Total taxable wealth = $54,000.
Total net worth = $54,000 just like the Simpsons.
Total taxable wealth will always be $54,000.

Flanders gets a $600 tax break right away for it. PV = 600 obviously for that benefit. Use 15% rate so there's no issue between OI @ 15% and LTCG @ 15%, too.

Assume also, Flanders & Simpsons income was the same only, difference was Flanders withholding was $600 less. So there is no difference between wealth. Same income, same home design, same investment choices...Difference is Roth/TIRA election. Flanders picked TIRA to get a -0- balance due return.

Yield on Springfield Nuclear Power Plant bond = 6% (not free of risk)
Home price appreciation on Evergreen Terrace = 8% (not free of risk)
Use the same risk-free rate to discount all the values from 2047 to present, obviously...

2047 Comparison, continuing my example, where they started with same wealth in 2007, as shown above, in 2007:
12/31/2047
742 Evergreen Terr - Simpsons
IRA: $43,830 (6% SNPP bond)
Taxable home gain: $1,213,669 (8% appreciation)
Total net worth = $1,257,499, just like the Flanders, yet again
Taxable net worth = $1,213,669

740 Evergreen Terr - Flanders
IRA: $43,830 (6% SNPP bond)
Taxable home gain: $1,213,669 (8% appreciation)
Total net worth = $1,257,499 just like the Simspons, yet again
Taxable net worth = $1,257,499

All of their net worth is again, theirs to do as they please, including to pass on, spend, burn, toilet paper, whatever. They pack up and get to one of those all inclusive places in Florida, to run out the clock. "Phase 3 Estates of Del Boca Vista" Yet one neighbor pays less total taxes...

Flanders: 2047 total income $1,257,499 X 15% tax rate = $188,625 tax. PV at 4.91% T-Bill risk free rate = $26,570 less PV of TIRA benefit $600 = $25,970. Total tax as % of wealth = 15%

Simpsons: 2047 total income $1,213,669 X 15% tax rate = $182,050 tax. PV at 4.91% T-Bill risk free rate = $25,643.
Total tax as a % of wealth = 14.5%
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