Retiring in mid-70’s - Is 401k worth it?

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thatdarnfish
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Retiring in mid-70’s - Is 401k worth it?

Post by thatdarnfish »

Hello, all:

If someone is planning working in their current job until their mid 70’s, is it worth it to contribute to a 401k over contributing to a taxable account? (Contributing to Roth is a given.) In this case, will there essentially never be a time when someone is at a lower tax bracket before RMD’s kick in? As well, contributing to a 401k for so many years might lead to larger RMD’s which, when coupled with Social Security, could bump one up to a higher tax bracket than when working. Relatedly, Roth conversions would be difficult when someone is pulling in their regular salary because of a higher tax bracket, too.

I know many here are looking to retire in their 50’s and 60’s, but I’m wondering how the usual “max out your 401k” advice would apply to the unusual situation of someone working until 75? Thank you for your thoughts on this!
shanehackney
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by shanehackney »

Do you have access to a Roth 401k? I would go that direction over taxable accounts. After you max that then roll to taxable.
coachd50
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by coachd50 »

thatdarnfish wrote: Mon Apr 01, 2024 6:52 pm Hello, all:

If someone is planning working in their current job until their mid 70’s, is it worth it to contribute to a 401k over contributing to a taxable account? (Contributing to Roth is a given.) In this case, will there essentially never be a time when someone is at a lower tax bracket before RMD’s kick in? As well, contributing to a 401k for so many years might lead to larger RMD’s which, when coupled with Social Security, could bump one up to a higher tax bracket than when working. Relatedly, Roth conversions would be difficult when someone is pulling in their regular salary because of a higher tax bracket, too.

I know many here are looking to retire in their 50’s and 60’s, but I’m wondering how the usual “max out your 401k” advice would apply to the unusual situation of someone working until 75? Thank you for your thoughts on this!
I think this question has a big divide between financial theory and real life practice. How old is the person asking the question. Saying “i plan to work until I am 70” when you are decades away from that mark might be a bit premature
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thatdarnfish
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by thatdarnfish »

coachd50 wrote: Mon Apr 01, 2024 7:10 pm
I think this question has a big divide between financial theory and real life practice. How old is the person asking the question. Saying “i plan to work until I am 70” when you are decades away from that mark might be a bit premature
Thanks for your reply, and I recognize that this is an unusual situation. But, for the sake of argument, let’s just say that retiring in mid-70’s is almost guaranteed in this case.
coachd50
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by coachd50 »

thatdarnfish wrote: Mon Apr 01, 2024 7:33 pm
coachd50 wrote: Mon Apr 01, 2024 7:10 pm
I think this question has a big divide between financial theory and real life practice. How old is the person asking the question. Saying “i plan to work until I am 70” when you are decades away from that mark might be a bit premature
Thanks for your reply, and I recognize that this is an unusual situation. But, for the sake of argument, let’s just say that retiring in mid-70’s is almost guaranteed in this case.
Respectfully- living to the mid 70s is hardly “guaranteed”

Other than that, I will leave the computations to those more adept at the theoretical aspects
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cosmos
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by cosmos »

thatdarnfish wrote: Mon Apr 01, 2024 7:33 pm
coachd50 wrote: Mon Apr 01, 2024 7:10 pm
I think this question has a big divide between financial theory and real life practice. How old is the person asking the question. Saying “i plan to work until I am 70” when you are decades away from that mark might be a bit premature
Thanks for your reply, and I recognize that this is an unusual situation. But, for the sake of argument, let’s just say that retiring in mid-70’s is almost guaranteed in this case.
Do not know how old you are as someone else asked but it sounds like you are eligible for roths now? And you expect to be in a higher bracket because you have saved a ton of money in the 401k when RMD kicks in? Or I may be misreading it.

I think roth ira showed up around 1997 or 1998? I only remember I have never been able to use them due to making too much money so all of my retirement savings for the most part is in IRA/401k but unlike most bogleheads it is not 5-10 million so even with RMD i do not think its going to bother me much. i am less concerned about taxes than I am about not working to 85 or running out of money and I am not leaving this at all to heirs since there are none. Also no guarantee I make it to 65 let alone 75 :)
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finite_difference
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by finite_difference »

RMDs aren’t that bad in your 70s.

Your effective tax rate will also likely be pretty low unless you have a significant pension.

Remember you’re saving taxes at your marginal tax rate by filling your 401k, and then when you take distributions you start filling from the lowest tax bucket.

And even if you have such a large portfolio that your marginal tax rate becomes high, then that’s a good problem to have!

Maybe when you hit your 70s taxes will be abolished for seniors. Hey, you never know ;)
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madbrain
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by madbrain »

You can make all the plans you want, but life happens. Even if you live to see your 70s, you could be permanently unemployed well before that, or you could become disabled. There is a lot of age discrimination in hiring. With a 401k, you can start take SEPP distributions if this happens. You will then be in a very low tax bracket if you have no other income.
Longdog
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by Longdog »

thatdarnfish wrote: Mon Apr 01, 2024 6:52 pm Hello, all:

If someone is planning working in their current job until their mid 70’s, is it worth it to contribute to a 401k over contributing to a taxable account? (Contributing to Roth is a given.) In this case, will there essentially never be a time when someone is at a lower tax bracket before RMD’s kick in? As well, contributing to a 401k for so many years might lead to larger RMD’s which, when coupled with Social Security, could bump one up to a higher tax bracket than when working. Relatedly, Roth conversions would be difficult when someone is pulling in their regular salary because of a higher tax bracket, too.

I know many here are looking to retire in their 50’s and 60’s, but I’m wondering how the usual “max out your 401k” advice would apply to the unusual situation of someone working until 75? Thank you for your thoughts on this!
That's an interesting question. If all goes well, health and career wise, and if your only concern is having sufficient cash from 75 and onward, it probably doesn't make much of a difference and having money in taxable versus pre-tax does increase flexibility. But there may be other concerns and scenarios where it would be beneficial to have pre-tax money available. For example, if you plan to leave money to charities, it would be good to have money in pre-tax accounts for that purpose because it would have been deducted from your taxable income during your working years, and the charity would inherit it without having to pay taxes. A similar argument could be made for making qualified charitable distributions directly from a pre-tax account. Also, if you end up needing full-time nursing care at your latest stages of life, because those expenses are, to a large extent, deductible, it might be better to have money in pre-tax accounts to draw from because it would have been deducted from your taxable income early in life, and the deduction later in life would offset the withdrawal amount from the pre-tax account.

So, in short, there may be some benefits, other than for retirement cash-flow, to having at least some money in a 401k available later in life.
Steve
Twinsfan10
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by Twinsfan10 »

Always contribute enough into a 401K to get the company match. Do you have a Roth 401 K? If so you can put your money it that.
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CyclingDuo
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Re: Retiring in mid-70’s - Is 401k worth it?

Post by CyclingDuo »

thatdarnfish wrote: Mon Apr 01, 2024 6:52 pmIf someone is planning working in their current job until their mid 70’s, is it worth it to contribute to a 401k over contributing to a taxable account?
As mentioned above, certainly to get the employer 401k/403b match it is worth it!

Beyond that, for those born after 1960, RMDs are required to begin at age 75. For those born between 1951-1959, they must begin at age 73. Social Security will have begun for you as well if working until 75, so the location of your funds and how they are taxed play into the mix. If working until 75, there will obviously be no gap years to fill before RMDs and SS, so your concern on the withdrawals and lack of ability for conversions is understood. How far away from 75 are you currently?

At least our household considers having the tax diversity of a combination of money in tax deferred, Roth, and taxable being available. Do you have a Roth 401k or Roth 403b option available to you? The tax efficiency of something like Vanguard Total Stock Market Index Fund in your taxable account makes sense, as does loading up the bonds in your 401k/403b accounts (if you haven't already done so). Or if space is not available, using some space in I Bonds to defer interest on some of your taxable bond investments.

Without knowing your current age and portfolio, we could make the case for both maxing out the 401k/403b as well as make the case for getting the employer match and investing the rest in a taxable efficient manner. I wouldn't be surprised if we see more questions such as yours in the coming years as more decide to work beyond their early to mid 60's.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
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