2020 Vision - Budget Update & Roth vs Traditional

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jakehefty17
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2020 Vision - Budget Update & Roth vs Traditional

Post by jakehefty17 » Thu Aug 08, 2019 11:20 am

Hey Bogleheads!

I have a change in income/budget, which provides me with some future planning adjustments. I would appreciate feedback into any missed opportunities or opinions on my savings decisions. I won't go deep into asset allocation, but I'm all in index funds and around 85-90% stock.

I will be turning 28 in about a month. Got a big raise this June and I'm now at "full rate"(journeyman, 4 years experience) for my union position. My annual salary is now approximately $100k base (up from around $75k base, at which rate I made about $100k a year including overtime). Annual raises are union negotiated, and job security is reasonably good. Low cost of living, have 2 "roommates" (brother and girlfriend) that contribute.

Not married. No kids. Future plans unknown, but I'm happy.
Debt - $83,000 (Home, 3.25% with 13 years left on 15 year loan)
No credit card debt, student loans, and my car is paid off at only about 3.5 years old.
Emergency Fund - $12,000 Checking/Savings Accounts (close to 6 months expenses)
State Taxes - 6.57%
Federal Taxes - 24%
Current allocation - Around 85/15 stocks to bonds. Around 40% ex-US.

My current contributions are as follows:
Pre-tax 401k - 19% of salary, employer matches half of the first 6% (or 3%)
Roth IRA - Contribute the Maximum Annually (end of year)
Taxable - 10% contribution to ESPP, which I rollover quarterly to a basic ETF portfolio with Schwab
HSA - Contribute the Maximum Annually (whenever convenient)
Pension - Cash Balance, company contributes 5% Annual base rate (raises every 5 years, to a maximum of 9% at 20+ years) - I can't contribute

My approximate current retirement account savings:
401k - $71,500 (All my bond allocation is held here)
Roth IRA - $18,100 (maxed 3 years, no contribution yet this year because I worry about income limitations)
Taxable - $10,000 (Schwab index ETFs)
HSA - $8,750 (contributed this year's annual)
Pension - $16,000 (earns an interest rate prescribed by the Secretary of the Treasury for purposes of Section 417(e)(3)(C))

I started contributing 19% 401k and 10% ESPP last year in anticipation of this raise. I don't have to change anything to hit the maximum contribution next year, and I'm used to the automatic withdrawals. It's been livable at my previous rate.

I plan to increase my savings rates starting in 2020 (my first full year at this rate). I have no in-plan rollovers so no MEGA-backdoor Roth available.

According to my budget sheet, I can comfortably contribute an additional 5% to my taxable account quarterly, while maxing out all my tax-advantaged space. My budgeting does not include any overtime worked, which I like for simplicity and added flexibility built into the budget. According to my calculations, the total investments (company and individual) will total around $52k (mixed contributions) for 2020 at that rate.

It's too early for me to decide if I'll want to retire early. Too many variables. Especially if I throw in a significant other. Whatever life throws at me I'll have to adjust for, and thankfully I'm good at budgeting. Generally speaking, retirement around 55 sounds nice. That would allow some Traditional to Roth rollovers before retirement while I live off the taxable account. I'm looking for a some nice GENERAL advice for how to save.

***Questions:***
1. Should I consider switching my 401k contributions to Roth, or partial Roth? Almost all of my current 401k is pre-tax, and my budget would need to adjust significantly to account for taxes should I alter my contributions. Roth vs Traditional is so hard to plan for long-term.
2. How do I account for the cash balance pension in my overall asset allocation? (Is it fixed income? Leave it out? Is there a consensus?)
3. How am I doing? Is there something I can do better?

I'm not quite saving "until it hurts", however it feels like I am saving until it makes sense. Budget flexibility is very important to me, and I never build a budget that's overly constricting. I lived that way when I was broke and I hated it, breathing room is a must.

Anyway long post. Thanks for reading and please let me know what you think.
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

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David Jay
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Re: 2020 Vision - Budget Update & Roth vs Traditional

Post by David Jay » Thu Aug 08, 2019 12:52 pm

I would use the 401K as your marginal rate will be 22%.

In retirement you can probably withdraw most of that money in the 12% (eventually the 15%) bracket. The 12% bracket in today’s dollars for a married couple (I presume some day you will tie the knot) is $101,400 ($77,400 + $24,000).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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jakehefty17
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Re: 2020 Vision - Budget Update & Roth vs Traditional

Post by jakehefty17 » Thu Aug 08, 2019 2:51 pm

David Jay wrote:
Thu Aug 08, 2019 12:52 pm
I would use the 401K as your marginal rate will be 22%.

In retirement you can probably withdraw most of that money in the 12% (eventually the 15%) bracket. The 12% bracket in today’s dollars for a married couple (I presume some day you will tie the knot) is $101,400 ($77,400 + $24,000).
Thanks for responding!

Sometimes I wonder if I might end up "oversaving" into pre-tax space. My pension will eventually get rolled over into the pre-tax 401k or IRA, which could mean some high RMDs should I choose/need to work a full career.

How would you weigh a cash-balance pension into your asset allocation? Additionally, how does it effect the Roth/Traditional choice?
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

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FiveK
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Re: 2020 Vision - Budget Update & Roth vs Traditional

Post by FiveK » Thu Aug 08, 2019 2:59 pm

jakehefty17 wrote:
Thu Aug 08, 2019 11:20 am
1. Should I consider switching my 401k contributions to Roth, or partial Roth? Almost all of my current 401k is pre-tax, and my budget would need to adjust significantly to account for taxes should I alter my contributions. Roth vs Traditional is so hard to plan for long-term.
2. How do I account for the cash balance pension in my overall asset allocation? (Is it fixed income? Leave it out? Is there a consensus?)
3. How am I doing? Is there something I can do better?
1. It's ultimately a guess, but it can be an informed guess. See towards the bottom of the Investment Order post for one way to estimate your withdrawal marginal rate. Then compare that to the 22%-24% you can avoid paying now.
2. If you are receiving a fixed interest rate on the balance, then yes it's fixed income.
3. Keep up the good work!

niners9088
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Joined: Mon Jul 07, 2014 9:50 am

Re: 2020 Vision - Budget Update & Roth vs Traditional

Post by niners9088 » Thu Aug 08, 2019 3:10 pm

1. I would invest in the traditional 401k as well. You can always retire early and use up some of the 401k dollars before starting your pension.
2. For a time I had a pension and a similar situation as you. I somewhat considered it as the fixed portion and mostly just was more aggressive in my 401k. I'd still keep some fixed income in my 401k so I could re balance if needed.
3. I think you are doing well. I would consider a bit higher emergency fund, especially as a home owner. One HVAC issue and that could quickly deplete the fund, but other then that I think you are good.

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jakehefty17
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Location: New York

Re: 2020 Vision - Budget Update & Roth vs Traditional

Post by jakehefty17 » Tue Aug 13, 2019 8:29 am

FiveK wrote:
Thu Aug 08, 2019 2:59 pm
1. It's ultimately a guess, but it can be an informed guess. See towards the bottom of the Investment Order post for one way to estimate your withdrawal marginal rate. Then compare that to the 22%-24% you can avoid paying now.
2. If you are receiving a fixed interest rate on the balance, then yes it's fixed income.
3. Keep up the good work!
I'll check out the post as soon as I can. Thanks!
niners9088 wrote:
Thu Aug 08, 2019 3:10 pm
1. I would invest in the traditional 401k as well. You can always retire early and use up some of the 401k dollars before starting your pension.
2. For a time I had a pension and a similar situation as you. I somewhat considered it as the fixed portion and mostly just was more aggressive in my 401k. I'd still keep some fixed income in my 401k so I could re balance if needed.
3. I think you are doing well. I would consider a bit higher emergency fund, especially as a home owner. One HVAC issue and that could quickly deplete the fund, but other then that I think you are good.
I'll consider increasing my emergency fund. I figure if I run into any serious problem I could tap into the taxable account, but I hear what you're saying. Had to replace a water heater last year.
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

Olemiss540
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Re: 2020 Vision - Budget Update & Roth vs Traditional

Post by Olemiss540 » Tue Aug 13, 2019 7:05 pm

I would up your contribution rate to max your 2019 401k, even if you have to spend down a bit of your taxable account to do so as you are losing 30% due to your current marginal rate to taxes!

Otherwise, I cant give you much for advice since you are crushing it. Keep it up and 10 years from now you will be looking at millionaire status.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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