Continue to save in Tax Deferred Accounts?

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Topic Author
SlowInvestor
Posts: 5
Joined: Wed Apr 08, 2015 10:20 pm

Continue to save in Tax Deferred Accounts?

Post by SlowInvestor »

I am currently 37 and I believe I have enough in my retirement balance to allow me to retire at 60 with a yearly spending of inflation adjusted $50,000. My current job offers a 401k with a match. I am questioning whether I should continue to max out the yearly contribution or just contribute up to the match amount.

Current situation:
401(k) balance: 350,000 (90% S&P 500 and 10% Total Bond Market Index)
Retirement income goal: inflation adjusted equivelent of $50,000
Assumed rate of return before/after retirement: 7%/4%
Minimum yearly 401k contribution (employee/match): 12,000 (6,000/6,000)

I have no other financial obligations and have a 1 year emergency fund.

I don't not have a concrete goal in mind for this additional savings. However, I would like the ability to utilize before 59 whether it's for early retirement or just a large purchase. I don't plan to need this savings for 10 years.

My current options of where to put the additional savings is:
1 - Continue to max 401k with pretax dollars.
2 - Contribute post tax dollars for mega backdoor roth.
3 - Save in a taxable account.
4 - ????

Any thoughts would be welcomed. Thanks for taking the time to read this long post.
gclancer
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Re: Continue to save in Tax Deferred Accounts?

Post by gclancer »

Do you currently file your taxes as a single? Any chance you’ll get married in the future?
Grt2bOutdoors
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Re: Continue to save in Tax Deferred Accounts?

Post by Grt2bOutdoors »

If you are planning on $50k in today’s dollars which it sounds like you do want that, then keep saving. A 4 percent withdrawal rate of $350k is $14k. That is a 36k shortfall of 50k. How do you propose backfilling the shortfall. On the other hand if you want a nominal value then I’d still say keep saving as industry seems to believe future returns will be lower than the 7 percent you believe you may earn. If the returns fail to materialize then you run the risk of shortfall. I don’t believe a taxable account will provide an after-tax return higher than that of your 401k especially since a $50k withdrawal will likely place you in a 12 percent bracket today and likely will be just as low at retirement.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Continue to save in Tax Deferred Accounts?

Post by KlangFool »

OP,

1) What is wrong about the standard advice of maxing up your Trad 401K and put your tax savings into the Roth IRAs?


2) Why do you think that you would be continuously employed until 60 years old? Life happened.


3) Why do you think that 50K per year of expense at retirement is good enough for you? As far as I can tell, your current annual expense may be much more than that.

<<However, I would like the ability to utilize before 59 whether it's for early retirement or just a large purchase. >>

4) You can withdraw your Roth IRA's contribution at any time for any reason without tax and/or penalty.

KlangFool
JBTX
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Re: Continue to save in Tax Deferred Accounts?

Post by JBTX »

I would not assume $350k today will be enough. It may or may not be. You just don't know. Plus the more you save the more flexibility you have to retire early if you so choose. If you keep working and earning, and all of a sudden need more available spending money, perhaps scale back then. If you quit working then you can do Roth conversions at lower rates.

As others have stated a Roth IRA each year on the side is also good and the contributions are always accessible. Depending on your income and tax rate a Roth 401k option could have merit also.
runner3081
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Re: Continue to save in Tax Deferred Accounts?

Post by runner3081 »

Check out IRS rule 72t for accessing tax deferred before 59.
k b
Posts: 125
Joined: Tue Oct 15, 2013 8:43 pm

Re: Continue to save in Tax Deferred Accounts?

Post by k b »

Employer matching on 401k is almost “risk free” return on the money you invest (contribute). Think hard before giving it up.
LeftCoastIV
Posts: 208
Joined: Wed May 01, 2019 7:19 pm

Re: Continue to save in Tax Deferred Accounts?

Post by LeftCoastIV »

[1] and [2] both seem like sound decisions

As mentioned above, the employee match is free money.
And, backdoor (or mega backdoor) Roths will make you happy when you are older/retired and can pull the money out tax free.

Also, see here:
“How to access retirement funds early”: https://www.madfientist.com/how-to-acce ... nds-early/
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Brianmcg321
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Re: Continue to save in Tax Deferred Accounts?

Post by Brianmcg321 »

From 2000 to 2010 your portfolio achieved less than 2% return. It is referred to as the lost decade. If you weren't adding any money to your account during that time you would be far short of your goal. I wouldn't stop adding until I hit at least seven figures.

https://www.portfoliovisualizer.com/bac ... tion2_1=10
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
Topic Author
SlowInvestor
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Re: Continue to save in Tax Deferred Accounts?

Post by SlowInvestor »

gclancer wrote: Fri Sep 04, 2020 5:09 pm Do you currently file your taxes as a single? Any chance you’ll get married in the future?
I file single and have no plans for marriage. My tax bracket is currently 24%, but I also have a side business/investment that sometimes pushes me into the 32% bracket.
Grt2bOutdoors wrote: Fri Sep 04, 2020 5:11 pm If you are planning on $50k in today’s dollars which it sounds like you do want that, then keep saving. A 4 percent withdrawal rate of $350k is $14k. That is a 36k shortfall of 50k. How do you propose backfilling the shortfall. On the other hand if you want a nominal value then I’d still say keep saving as industry seems to believe future returns will be lower than the 7 percent you believe you may earn. If the returns fail to materialize then you run the risk of shortfall. I don’t believe a taxable account will provide an after-tax return higher than that of your 401k especially since a $50k withdrawal will likely place you in a 12 percent bracket today and likely will be just as low at retirement.
Yes, I am planning a $50k in today's dollars for my retirement. I will continue to work until 59 and will continue to contribute $12,000 annual to take advantage of the "free" money provided by my employer. Based on those factors with a 7% return growth before retirement, and 4.5% return during retirement, I should have enough to support myself until I am 90. These are the assumptions I am working on. My shortfall plan is to spend less and social security.
KlangFool wrote: Fri Sep 04, 2020 5:13 pm OP,

1) What is wrong about the standard advice of maxing up your Trad 401K and put your tax savings into the Roth IRAs?


2) Why do you think that you would be continuously employed until 60 years old? Life happened.


3) Why do you think that 50K per year of expense at retirement is good enough for you? As far as I can tell, your current annual expense may be much more than that.

<<However, I would like the ability to utilize before 59 whether it's for early retirement or just a large purchase. >>

4) You can withdraw your Roth IRA's contribution at any time for any reason without tax and/or penalty.

KlangFool
1 - The biggest issue is I cannot use the money in the account until 59 1/2 without penalty.
2 - No specific reason, but as you said life happens and I'd like to enjoy it a bit more. I'm trying to find a balance between saving for retirement and using the money for life in the nearer future.
3 - I've calculated the minimum I need to spend and added to that to come up with 50k.
4 - Yes, I am questioning should I stop contributing the max to the pretax account and instead contribute to the tax free/taxable.
KlangFool
Posts: 17780
Joined: Sat Oct 11, 2008 12:35 pm

Re: Continue to save in Tax Deferred Accounts?

Post by KlangFool »

SlowInvestor wrote: Fri Sep 04, 2020 8:14 pm
1 - The biggest issue is I cannot use the money in the account until 59 1/2 without penalty.

SlowInvestor,

1 - The biggest issue is I cannot use the money in the account until 59 1/2 without penalty.

This statement is false.


https://www.madfientist.com/how-to-acce ... nds-early/

And, if you have a side business, you may be able to open your own individual 401K and deferred even more taxes.


https://www.bogleheads.org/wiki/Solo_401(k)_plan


KlangFool
catlady
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Re: Continue to save in Tax Deferred Accounts?

Post by catlady »

SlowInvestor wrote: Fri Sep 04, 2020 8:14 pm 3 - I've calculated the minimum I need to spend and added to that to come up with 50k.
Is $50k/yr before or after taxes? Are you accounting for the loss of employer provided health insurance?
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JoMoney
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Re: Continue to save in Tax Deferred Accounts?

Post by JoMoney »

I would maximize the contributions (and get the current tax-deduction for) traditional 401k contributions.
You didn't provide what your current top income tax bracket is, but regardless, because of the way our progressive income tax system is, the deduction you get for those contributions while you're earning money now is likely more than the tax rate you'll pay on that money during withdrawals presuming you don't have other income in retirement.

If you desire to retire early, I would also consider after-tax 401k contributions (if available) that can be rolled into a Roth IRA, and also regular Roth IRA contributions (if you're eligible to make those).
Those after-tax contributions (but not the earnings) can be rolled over to a Roth IRA, and available to withdraw without tax or penalty, as are normal Roth IRA contributions. If you can accumulate 5 years worth of income in after-tax contributions/Roth IRA contributions, then you'll have enough seeded to setup a
"Roth IRA Conversion Ladder"
Conversions (but not the earnings) of pre-tax IRA/401k money to a Roth IRA can be withdrawn from the Roth account without penalty (even before age 59.5) after 5 years.
Coupled with the 5 years of after-tax contributions you would have already accumulated, and are eligible for immediate withdrawal without penalty, you can begin early withdrawals from the Roth account, and every year convert the amount you'll be withdrawing 5 years in the future.

... and if you don't 'retire early', it's still an advantageous position to be in having your money in tax-sheltered accounts where you can rebalance/trade/adjustments/move assets without creating tax impacts.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
nolesrule
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Re: Continue to save in Tax Deferred Accounts?

Post by nolesrule »

SlowInvestor wrote: Fri Sep 04, 2020 8:14 pm
I file single and have no plans for marriage. My tax bracket is currently 24%, but I also have a side business/investment that sometimes pushes me into the 32% bracket.

This alone would be the reason to keep deferring. Assuming your current projections are correct you'd be paying taxes at a much lower rate in withdrawal, especially if it's keeping you out of the 32% bracket.

But for some reason if you don't want to go tax deferred, then go Roth, so that you are not paying taxes on gains.
Topic Author
SlowInvestor
Posts: 5
Joined: Wed Apr 08, 2015 10:20 pm

Re: Continue to save in Tax Deferred Accounts?

Post by SlowInvestor »

Thanks to everybody that offered advice. I'm going to continue with my current course of maxing out my pretax 401k and use a backdoor roth if I have any remaining savings.

I will keep my portfolio as 90% Vanguard Total Market / 10% Vanguard Total Bond for the next 10 years or so. Anybody see major issues with that?
crefwatch
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Location: New Jersey, USA

Re: Continue to save in Tax Deferred Accounts?

Post by crefwatch »

There are too many known unknowns: Tax rates, US economy, wars, epidemics, health care costs, future interest rates, future market returns, your health, your preference for local doctors and hospitals, .... . You do not have remotely enough money put away to believe that you are ready for retirement. I agree that you should post again when you pass $1,000,000.
terran
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Re: Continue to save in Tax Deferred Accounts?

Post by terran »

In addition to the Madfientist link above (short version: make sure you save up 5 years of spending in taxable and/or Roth contributions by the time you retire) take a look at https://earlyretirementnow.com/safe-wit ... te-series/ to figure out how much you'll need to save (short version: count on more like a 3.25-3.5% withdrawal rate instead of a 4-4.5% rate).

While 7% is pretty close to the historical real rate of the return (after inflation), I use the somewhat more pessimistic 5%, but not as pessimistic as some people on this forum. My thinking is that I'd rather have a little extra money and/or retire a few years earlier than planned than undersave.
Topic Author
SlowInvestor
Posts: 5
Joined: Wed Apr 08, 2015 10:20 pm

Re: Continue to save in Tax Deferred Accounts?

Post by SlowInvestor »

terran wrote: Mon Sep 07, 2020 3:02 pm In addition to the Madfientist link above (short version: make sure you save up 5 years of spending in taxable and/or Roth contributions by the time you retire) take a look at https://earlyretirementnow.com/safe-wit ... te-series/ to figure out how much you'll need to save (short version: count on more like a 3.25-3.5% withdrawal rate instead of a 4-4.5% rate).

While 7% is pretty close to the historical real rate of the return (after inflation), I use the somewhat more pessimistic 5%, but not as pessimistic as some people on this forum. My thinking is that I'd rather have a little extra money and/or retire a few years earlier than planned than undersave.
The blog is pretty interesting and there's a lot of information. The writer seems to advocate not having an emergency fund and not invest in bonds. Is that a fringe idea or acceptable among fellow bogleheads?
terran
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Re: Continue to save in Tax Deferred Accounts?

Post by terran »

SlowInvestor wrote: Tue Sep 08, 2020 2:56 pm
terran wrote: Mon Sep 07, 2020 3:02 pm In addition to the Madfientist link above (short version: make sure you save up 5 years of spending in taxable and/or Roth contributions by the time you retire) take a look at https://earlyretirementnow.com/safe-wit ... te-series/ to figure out how much you'll need to save (short version: count on more like a 3.25-3.5% withdrawal rate instead of a 4-4.5% rate).

While 7% is pretty close to the historical real rate of the return (after inflation), I use the somewhat more pessimistic 5%, but not as pessimistic as some people on this forum. My thinking is that I'd rather have a little extra money and/or retire a few years earlier than planned than undersave.
The blog is pretty interesting and there's a lot of information. The writer seems to advocate not having an emergency fund and not invest in bonds. Is that a fringe idea or acceptable among fellow bogleheads?
I was mostly sharing the link to that specific series (about withdrawal rates). I'd say the "no emergency fund" concept is pretty split around here with the majority advocating an emergency fund for lower net worth people, and maybe no specific emergency fund for higher net worth people who have plenty of ready access to other funds.

No bonds is also probably somewhat split, but you'd probably find more people who would skew from somewhat to much more conservative (10-40% instead of 0% bonds). Even among those encouraging no bonds during accumulation (I'm nearer that camp), most would probably encourage a larger bond allocation during the early retirement years to combat sequence of returns risk, as does the Early Retirement Now blog.

Other people might have other thoughts on what the majority opinion is here -- I'm just going on my general feel, but nothing concrete.
marcopolo
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Re: Continue to save in Tax Deferred Accounts?

Post by marcopolo »

runner3081 wrote: Fri Sep 04, 2020 5:58 pm Check out IRS rule 72t for accessing tax deferred before 59.
I would opt for a Roth conversion ladder before considering a 72t plan. But, you basic idea that one should not fear tying up money in a tax advantaged account is spot on.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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