Contribute less to 401k if one will have pension?

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RL1013
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Contribute less to 401k if one will have pension?

Post by RL1013 »

If we are supposed to get a state pension during retirement, should we stop maxing 401k accounts and focus on ROTH and non tax advantaged accounts? We are in our late 30s and currently have around 300k in our combined 401k and IRA accounts. We were planning to max out 401k accounts until retirement (No plans for early retirement). But since doing the pension estimation, we are wondering if it's a good idea to defer taxes. With pension, social security, and whatever our 300k will grow to in 20 or so years, may be it would be a good idea to start investing through a trading account so that we have easy access to money anytime. We are in 22% tax bracket right now. No debts other than mortgage which will be paid off in 10 years or less. Minimum estimated pension for wife 1800 per month. Social security, not sure how much it would be , but expecting minimum 1100 each per month. Our average (past 3 years) annual expense is 70,000 including 1200 per month mortgage. So, per this calculation all I need to draw from my 401k is around 2000 per month at retirement to sustain current living expenses. Please poke holes in this analysis and let me know what I am missing or assuming incorrectly.
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FiveK
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Re: Contribute less to 401k if one will have pension?

Post by FiveK »

RL1013 wrote: Tue Jan 12, 2021 4:19 am If we are supposed to get a state pension during retirement, should we stop maxing 401k accounts
Not if you have a Roth option for the 401k. See Investment Order and Prioritizing investments for general suggestions.

As for traditional vs. Roth, it seems you have the right approach. Have you taken it to the point of Estimating your future marginal tax rate and comparing that to your current 22%?
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celia
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Re: Contribute less to 401k if one will have pension?

Post by celia »

RL1013 wrote: Tue Jan 12, 2021 4:19 am ...With pension, social security, and whatever our 300k will grow to in 20 or so years, ...
This looks like you are assuming:
* You/spouse will continue to work at a company that has a pension...
* You will be around in 20 years...
* The stock markets will grow your current balance....
* You will not have an expensive situation that derails your life (disability, natural disaster, unexpected liability)...
* Unexpectedly high inflation...

A lot can happen in the next 20 or 30 years, as seen by just the last year. Even if you should die, your spouse/family would need to carry on. So, plan accordingly.
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cheese_breath
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Re: Contribute less to 401k if one will have pension?

Post by cheese_breath »

Considering the financial 'mess' the federal and many state governments are in now I wouldn't count on social security and your state pension to provide the same benefits 30 years from now that current pensioners receive.
The surest way to know the future is when it becomes the past.
runner3081
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Re: Contribute less to 401k if one will have pension?

Post by runner3081 »

Though I have a pension, I am not planning to use those numbers to determine if I can retire- same as SS. I am assuming that post-tax, ROTH, HSA, 401K, 457 will need to get me through.
megabad
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Re: Contribute less to 401k if one will have pension?

Post by megabad »

Your expenses don't really have anything to do with it but I think you could justify at least partially switching to Roth. The question is always the same: Will your marginal tax rate be higher when you take the money out than now? If so, than Roth. Obviously this is impacted by everything: early retirement, Roth conversion ladders, lack of inflation riders on pensions etc etc.
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Watty
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Re: Contribute less to 401k if one will have pension?

Post by Watty »

RL1013 wrote: Tue Jan 12, 2021 4:19 am .... stop maxing 401k accounts and focus on ROTH and non tax advantaged accounts?

We are in our late 30s
....
We are in 22% tax bracket right now. No debts other than mortgage which will be paid off in 10 years or less.
Tax laws can change but currently the next higher federal tax bracket is 24% which is only 2% higher.

Even if you do get into the 24% federal tax bracket when you are retired getting a 2% savings is not enough that I would want to pay my taxes decades earlier than I would need to.

If things are still going well when you are in your 50s and getting close to retirement you may also be able to do Roth conversions up to the top of the 22% federal tax bracket if it makes sense then

In your situation there is no way that I would skip a deductible 401k contribution to save in a Roth.

If you have money in a taxable account or additional income to invest you could still use that to fund the Roths since investing in a Roth is better than investing in a taxable account.

Reducing your 401k contributions in order to get the house paid off sooner is another scenario to consider if getting a paid off house is real important to you. If you have kids having a paid off house by the time they are in college can allow you to pay more of the college expenses out of your cash flow.
RL1013 wrote: Tue Jan 12, 2021 4:19 am Minimum estimated pension for wife 1800 per month. Social security, not sure how much it would be , but expecting minimum 1100 each per month. Our average (past 3 years) annual expense is 70,000 including 1200 per month mortgage. So, per this calculation all I need to draw from my 401k is around 2000 per month at retirement to sustain current living expenses. Please poke holes in this analysis and let me know what I am missing or assuming incorrectly.
I did not follow your numbers but one thing to keep in mind is that a couple can have over $100K in taxable income and still be in the 12% federal tax bracket. It does not sound like you would need more than than in retirement especially since your house will be paid off by then.
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Nate79
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Re: Contribute less to 401k if one will have pension?

Post by Nate79 »

It's very hard to predict the future in any of this. In that case I think it is best to have a combination of funds available for retirement (pre-tax, Roth and taxable).
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Re: Contribute less to 401k if one will have pension?

Post by mtn biker »

As with all things, it's a judgement call. I have a pension, but I also max out my 403b, and I recommend you do the same. You can't go back in time and get that option back if you skip it. And you can't get that growth back. You don't discuss your situation and your goals, so maybe you know things that convince you the 401k contributions aren't needed, but without more info I can't imagine anyone recommending you skip it.

I guess you have a lot of assumptions in your logic, are you willing to bet all those assumptions stay true? I'd get closer to retirement before making that bet.
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Re: Contribute less to 401k if one will have pension?

Post by willthrill81 »

cheese_breath wrote: Tue Jan 12, 2021 9:36 am Considering the financial 'mess' the federal and many state governments are in now I wouldn't count on social security and your state pension to provide the same benefits 30 years from now that current pensioners receive.
I share your viewpoint.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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corn18
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Re: Contribute less to 401k if one will have pension?

Post by corn18 »

runner3081 wrote: Tue Jan 12, 2021 10:44 am Though I have a pension, I am not planning to use those numbers to determine if I can retire- same as SS. I am assuming that post-tax, ROTH, HSA, 401K, 457 will need to get me through.
If you are young, that's ok, but if you are close to retirement, this would be silly. You will have to work a lot longer if you do not consider any of those sources.
Don't do something, just stand there!
runner3081
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Re: Contribute less to 401k if one will have pension?

Post by runner3081 »

corn18 wrote: Tue Jan 12, 2021 1:02 pm
runner3081 wrote: Tue Jan 12, 2021 10:44 am Though I have a pension, I am not planning to use those numbers to determine if I can retire- same as SS. I am assuming that post-tax, ROTH, HSA, 401K, 457 will need to get me through.
If you are young, that's ok, but if you are close to retirement, this would be silly. You will have to work a lot longer if you do not consider any of those sources.
10 years out from early retirement, 25 years from SS and Pension payments.

We are hyper savers and won't likely need to rely on the SS or Pension for living expenses. They will be play money.
KlangFool
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Re: Contribute less to 401k if one will have pension?

Post by KlangFool »

OP,


1) Do you have kids?


2) Do you plan to pay for their college education?


3) Do you plan to pay off the mortgage and take a more expensive student loan for your kids?

4) Is your pension vested?

5) if you have to leave your employer earlier, what is the vested pension amount?


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RL1013
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Re: Contribute less to 401k if one will have pension?

Post by RL1013 »

Thanks to everyone who sent replies. The overall sentiment I am hearing is "Don't assume that you will get similar pension/ss benefits 30 years down the line".
KlangFool wrote: Tue Jan 12, 2021 1:45 pm OP,
1) Do you have kids?
Yes.
KlangFool wrote: Tue Jan 12, 2021 1:45 pm
2) Do you plan to pay for their college education?
I have a 529 plan for the kid. Currently has around 13k in it and contributing $250 per month. 10 years for kid to go to college. I fully understand that the savings in 529 will be nowhere close to fully fund 4-year college.
KlangFool wrote: Tue Jan 12, 2021 1:45 pm 3) Do you plan to pay off the mortgage and take a more expensive student loan for your kids?
One of the suggestions that I got in response to the question was to payoff the mortgage earlier. Mortgage interest is 3%. I haven't run the numbers on that but will consider it if it does not put stress on my numbers. For kid's college, I will tap into 529, then plan to cash flow the rest. At that point, If both of us are working, one of us (Probably me) would stop contributing to 401k and use it for college. House should be paid off by then. If I am not able to cash flow due to some unforeseen circumstances, I will take the loan which is the last option.
KlangFool wrote: Tue Jan 12, 2021 1:45 pm 4) Is your pension vested?
Vesting eligibility is 5 years and spouse is now vested.
KlangFool wrote: Tue Jan 12, 2021 1:45 pm 5) if you have to leave your employer earlier, what is the vested pension amount?
If 5 years is completed, we can keep the funds intact and based on service years, you are eligible for a pension. You also have the option to take it out or roll it into and IRA but she will have access only to the employee contribution and interest. Not to the employer contribution.
The monthly pension amount is calculated based on the formula Monthly pension = 2% x Service years x Average max monthly compensation.
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Re: Contribute less to 401k if one will have pension?

Post by KlangFool »

RL1013 wrote: Tue Jan 12, 2021 2:32 pm

One of the suggestions that I got in response to the question was to payoff the mortgage earlier. Mortgage interest is 3%. I haven't run the numbers on that but will consider it if it does not put stress on my numbers.
RL1013,

1) By not maxing up the Trad 401K, you are essentially paying 20+% taxes in order to save 3% mortgage interest. Why is that a good idea?


2) Instead of 529, you could have max up your 401K and use the tax savings to fund Roth IRAs.


3) If you have any possibility of using a student loan, why would you pay off a 3% mortgage so that you could take a more expensive student loan?

4) Why do you choose to pay 20+% taxes in order to contribute to the 529? You should max up your Trad 401K instead.

5) Roth 12K per year X 18 years = 216K of Roth IRA contribution is more than what you are willing to pay for college education anyhow.

6) Skip the 529 and skip the mortgage pre-payment. Max up your Trad 401K and Roth IRAs.

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willthrill81
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Re: Contribute less to 401k if one will have pension?

Post by willthrill81 »

KlangFool wrote: Tue Jan 12, 2021 2:56 pm
RL1013 wrote: Tue Jan 12, 2021 2:32 pm

One of the suggestions that I got in response to the question was to payoff the mortgage earlier. Mortgage interest is 3%. I haven't run the numbers on that but will consider it if it does not put stress on my numbers.
RL1013,

1) By not maxing up the Trad 401K, you are essentially paying 20+% taxes in order to save 3% mortgage interest. Why is that a good idea?
Contributing to a 401(k) defers taxes but does not avoid them. If there will be tax arbitrage relative to the rates at contribution vs. withdrawal, which there often is, then the mathematically optimal path is to max the 401(k) first. But if there isn't, then paying down/off the mortgage to get a guaranteed 3% rate of return is better than almost any other fixed income investment available now.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Admiral
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Re: Contribute less to 401k if one will have pension?

Post by Admiral »

RL1013 wrote: Tue Jan 12, 2021 4:19 am If we are supposed to get a state pension during retirement, should we stop maxing 401k accounts and focus on ROTH and non tax advantaged accounts? We are in our late 30s and currently have around 300k in our combined 401k and IRA accounts. We were planning to max out 401k accounts until retirement (No plans for early retirement). But since doing the pension estimation, we are wondering if it's a good idea to defer taxes. With pension, social security, and whatever our 300k will grow to in 20 or so years, may be it would be a good idea to start investing through a trading account so that we have easy access to money anytime. We are in 22% tax bracket right now. No debts other than mortgage which will be paid off in 10 years or less. Minimum estimated pension for wife 1800 per month. Social security, not sure how much it would be , but expecting minimum 1100 each per month. Our average (past 3 years) annual expense is 70,000 including 1200 per month mortgage. So, per this calculation all I need to draw from my 401k is around 2000 per month at retirement to sustain current living expenses. Please poke holes in this analysis and let me know what I am missing or assuming incorrectly.
Are you estimating what your wife will get in twenty years if she continues in the same job? Or what she would be entitled to at eligibility age if she separates tomorrow?

Just because one is vested does not mean that things won't change before the pension is paid (usually age 60-65, slightly younger for teachers and police/fire.) If spouse is late-30s, I am assuming what you are doing is a future value projection, assuming she is employed at same job, with escalating salary, for 20 more years. (It would be highly unlikely--though not impossible--for someone in their 30s to have already earned that level of pension payout with no addl years of service.)

I recommend you not try to predict pensions or account balances 20 years hence and then stop pre-tax savings based on that prediction. When you are, say, 50 (or even late 40s) then you will have plenty of time to build up Roth, or convert to Roth.

Echo others, max pre-tax before Roth, and Roth before 529.
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RL1013
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Re: Contribute less to 401k if one will have pension?

Post by RL1013 »

KlangFool wrote: Tue Jan 12, 2021 2:56 pm 6) Skip the 529 and skip the mortgage pre-payment. Max up your Trad 401K and Roth IRAs.
KlangFool, Thanks for your inputs. I will continue to max 401k with the intent to convert in later years. On another note, In 2021, I am expecting to have some money left over after maxing both our 401k, both our Roth's and contributing 5k to our taxable. In that case which one makes more sense? Put the remaining money towards paying off our house or contributing to 529 or dump the rest also into taxable?
KlangFool
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Re: Contribute less to 401k if one will have pension?

Post by KlangFool »

RL1013 wrote: Tue Jan 12, 2021 5:37 pm
KlangFool wrote: Tue Jan 12, 2021 2:56 pm 6) Skip the 529 and skip the mortgage pre-payment. Max up your Trad 401K and Roth IRAs.
KlangFool, Thanks for your inputs. I will continue to max 401k with the intent to convert in later years. On another note, In 2021, I am expecting to have some money left over after maxing both our 401k, both our Roth's and contributing 5k to our taxable. In that case which one makes more sense? Put the remaining money towards paying off our house or contributing to 529 or dump the rest also into taxable?
RL1013,

I prefer the taxable or pay down the mortgage. Until your retirement is fully guaranteed, it is not safe to assume that you can afford to pay for a college education. If you cannot afford to pay for a college education, you do not want the 529 to prevent your kids from getting need-based financial aid.


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RL1013
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Re: Contribute less to 401k if one will have pension?

Post by RL1013 »

Admiral wrote: Tue Jan 12, 2021 4:45 pm Are you estimating what your wife will get in twenty years if she continues in the same job? Or what she would be entitled to at eligibility age if she separates tomorrow?
No, I estimated more than the minimum (separates tomorrow from the job). The vesting period is 5 years. I estimated 13 years for which it would be approximately $1800. Again, I can't be sure about these and I hear what you are saying. Even if our intention is to continue in the job and they have unions which kind of sort of protection against sudden job loss, I agree that a lot can change in a few years (like 2020). I also can't accurately estimate what her salary would be in a few years. Just trying to see if we really need to stack up and lock up more money than needed in 401k or should I save it in taxable in such a way that we both can have more flexible spending options down the line.
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