What's a good retirement/taxable ratio?

[faanger101]

Hello all and thank you for running such a great community!
I recently started a job which allows Mega Roth. I got the following theoretical question - is there any table that shows optimal retirement/taxable savings ratio for different planned retirement ages?
For example, I assume if I'd like to retire at 70 it's good to have 100% funds in tax advantage retirement accs but if I want to retire at 25 I should have pretty much everything in regular accs.

[yules]

Hello all and thank you for running such a great community!
I recently started a job which allows Mega Roth. I got the following theoretical question - is there any table that shows optimal retirement/taxable savings ratio for different planned retirement ages?
For example, I assume if I'd like to retire at 70 it's good to have 100% funds in tax advantage retirement accs but if I want to retire at 25 I should have pretty much everything in regular accs.

Even if you wanted to retire at 70, it’s good to have 100% fund in tax advantaged retirement accounts, but IMO it’s not ideal.

1) What if you are forced to retire early? What if it is super early, before age 59.5? Will you be able to withdraw retirement money without penalties? You can want to retire at 70, but sometimes you don’t have a say in the matter!

2) What if you suddenly need a new roof? Or have non-fatal, but high medical bills at age 35 or age 25? Again, you would not have access to money without paying a penalty.

I would feel safer having a comfortable cushion of funds in taxable accounts just in case. This is behind just the “emergency fund”. How much comfort one is comfortable with is subjective.

Yules

[FiveK]

I got the following theoretical question - is there any table that shows optimal retirement/taxable savings ratio for different planned retirement ages?

No, because the ratios aren't as important as the absolute amounts. Some general guidelines (yes, there can be exceptions but...):
- If the choice is between Roth and taxable, choose Roth. The cost to invest is identical, but the Roth grows tax free and you pay taxes on taxable growth.
- If the choice is between traditional and Roth, choose the one that incurs the lower marginal tax rate when comparing contribution now vs. withdrawal later. See Traditional versus Roth for more.

In short, one reasonable approach is
a) to increase your traditional balance until the likely marginal rate on withdrawals equals the marginal rate saved on contributions
b) next, maximize your Roth contributions
c) finally, invest taxably as much as you can while still enjoying life

The ratios will be whatever they will be, but are a consequence instead of a target.

[toddthebod]

Hello all and thank you for running such a great community!
I recently started a job which allows Mega Roth. I got the following theoretical question - is there any table that shows optimal retirement/taxable savings ratio for different planned retirement ages?
For example, I assume if I'd like to retire at 70 it's good to have 100% funds in tax advantage retirement accs but if I want to retire at 25 I should have pretty much everything in regular accs.

Even if you wanted to retire at 70, it’s good to have 100% fund in tax advantaged retirement accounts, but IMO it’s not ideal.

1) What if you are forced to retire early? What if it is super early, before age 59.5? Will you be able to withdraw retirement money without penalties? You can want to retire at 70, but sometimes you don’t have a say in the matter!

2) What if you suddenly need a new roof? Or have non-fatal, but high medical bills at age 35 or age 25? Again, you would not have access to money without paying a penalty.

I would feel safer having a comfortable cushion of funds in taxable accounts just in case. This is behind just the “emergency fund”. How much comfort one is comfortable with is subjective.

Yules

1. SEPP withdrawals

2. Emergency fund or HELOC for the roof, and withdrawals for medical expenses >10% AGI are permitted.

Also, Roth IRA contributions can be withdrawn at any time.

[Nathan Drake]

I would just focus on maximizing tax sheltered retirement accounts first and then filling up taxable if you have space to do so, assuming no other priorities (down payment, etc)

[H-Town]

Hello all and thank you for running such a great community!
I recently started a job which allows Mega Roth. I got the following theoretical question - is there any table that shows optimal retirement/taxable savings ratio for different planned retirement ages?
For example, I assume if I'd like to retire at 70 it's good to have 100% funds in tax advantage retirement accs but if I want to retire at 25 I should have pretty much everything in regular accs.

Just max out mega back door Roth and then push the rest to taxable. Why would you care about the ratio? If you have high saving rate, you should end up with much more taxable account compared to tax advantaged account

[02nz]

For example, I assume if I'd like to retire at 70 it's good to have 100% funds in tax advantage retirement accs but if I want to retire at 25 I should have pretty much everything in regular accs.

Absolutely incorrect (but a very common misconception). The earlier you retire, the more you want to have in tax-deferred accounts. Early retirement means lots of years of no income, and you want to fill up the zero- and low-income space with Roth conversions. A married couple with no other income can convert over $100K every year at an average of about 9% federal income tax. And the converted amount (but not growth) can be withdrawn after 5 years, so you really only need a 5-year "bridge" in taxable.

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

[grabiner]

The optimal ratio is likely to be 100/0, even if you retire early. You can withdraw from a traditional IRA by taking Substantially Equal Periodic Payments and avoid the penalty for withdrawal before age 59-1/2. And if you need to spend more, you can withdraw contributions, and conversions made at least five years ago, from a Roth IRA (including amounts rolled over from a Roth 401(k)). This allows you to keep as much money growing tax-free as possible.

[Nowizard]

Another consideration for the comment about retirement accounts being the best place to have all your money is the size of your portfolio at retirement. If it is substantial, you may have higher taxable income in retirement than when working, particularly if you also have SS and a pension. That can result in having to withdraw more than desired to meet expenses once you begin taking RMD's, and it can put you into higher tiers for Medicare.

Tim

[sailaway]

Retirement to taxable is completely irrelevant.

Tax deferred to Roth to taxable still doesn't have an ideal ratio, but rather should be determined by your circumstances. The wonderful thing about MBR is that if you convert to Roth IRA you can have access to the funds in a short time. Our first MBR had a small loss, so we can actually access that at any time without incurring penalties.

[4nursebee]

I’d rather have a pile of money in lt cap gains taxable than the same pile of money in tax deferred.

We did lower our taxes while working by large deferred contributions

No ideal ratio.

We did our best, you should try to do the same.

[N.Y.Cab]

Taxable account can be invested almost as tax efficiently as Roth. And with the eventual RMD, I look at tax-deferred accounts (TDA) in 401k and traditional IRA as a separate pile. Half and half would be ideal for me as it would allow the TDA to hold mostly bonds, minimize future RMD somewhat.

[Jack FFR1846]

It depends theoretically what tax bracket you are in now and what you'll be when you retire. Say you and your spouse are doctors in high pay specialties pulling in enough to be in the 37% federal tax bracket. I would say that you absolutely should be in a traditional 401k with zero in a Roth 401k. When you retire, you will likely be in a lower bracket and if you're not, it's probably because you're creating enough income to support 4 average families in the US.

[quisp65]

So many factors and my 2 cents. You just don't want to have too much in tax deferred while getting as much tax reduction as you can while contributing. In taxable you would want enough to live off when you retire till RMDs while converting tax deferred to Roth when it's efficient.

Each of those factors is different depending upon person & situation but I think that's what to look at.

[Watty]

For example, I assume if I'd like to retire at 70 it's good to have 100% funds in tax advantage retirement accs but if I want to retire at 25 I should have pretty much everything in regular accs.

In addition to all the other good comments so far if you are going to be able to retire very early you will likely know that at least five years before you actually retire.

That five years gives you plenty of time to try to get a good balance of taxable and retirement accounts.

There are also some things that people often overlook in their financial planning.

1) You may be doing great now but there are lots of things like burnout, health problems, the death of a spouse, etc that can cause your plans to go out the window and change your retirement situation. You are a long way from being in a high retirement tax bracket.

2) You have no idea what the tax laws will look like decades from now.

3) You may have other goals than just retirement. Like saving up for a home down payment. With a taxable account it is easier to change you mind and use that money for something else.

Don't think you can come up with a fine tuned plan for decades in the future.

[sailaway]

It depends theoretically what tax bracket you are in now and what you'll be when you retire. Say you and your spouse are doctors in high pay specialties pulling in enough to be in the 37% federal tax bracket. I would say that you absolutely should be in a traditional 401k with zero in a Roth 401k. When you retire, you will likely be in a lower bracket and if you're not, it's probably because you're creating enough income to support 4 average families in the US.

Even though OP was asking about mega backdoor Roth?

[grabiner]

I’d rather have a pile of money in lt cap gains taxable than the same pile of money in tax deferred.

While this is true, it isn't the right comparison, because it cost less to get the money in the tax-deferred account. If you are in the 22% tax bracket, it costs you only $780 out of pocket to put $1000 in your 401(k), and $1000 in a 401(k) is better than $780 in a taxable account. (Early retirees aren't likely to be in the uncommon situation in which they are stuck with a high-cost 401(k) for so many years that they are better off with taxable investments.)

[Wanderingwheelz]

I’d rather have a pile of money in lt cap gains taxable than the same pile of money in tax deferred.

While this is true, it isn't the right comparison, because it cost less to get the money in the tax-deferred account. If you are in the 22% tax bracket, it costs you only $780 out of pocket to put $1000 in your 401(k), and $1000 in a 401(k) is better than $780 in a taxable account. (Early retirees aren't likely to be in the uncommon situation in which they are stuck with a high-cost 401(k) for so many years that they are better off with taxable investments.)

For an early retiree it can have an impact on health insurance costs though, no? It would be unlikely to retire early and have all of your taxable investments showing long term capital gains, anyway, since it’s typical to have your best earning years right before you retire. Especially since most is us start out using equities in tax deferred accounts, and then as our wealth and income get larger we often make a shift to holding bonds in tax deferred and have our taxable be more-or-less entirely equities.

If you’re paying a mortgage or rent, perhaps this is irrelevant.

[grabiner]

I’d rather have a pile of money in lt cap gains taxable than the same pile of money in tax deferred.

While this is true, it isn't the right comparison, because it cost less to get the money in the tax-deferred account. If you are in the 22% tax bracket, it costs you only $780 out of pocket to put $1000 in your 401(k), and $1000 in a 401(k) is better than $780 in a taxable account. (Early retirees aren't likely to be in the uncommon situation in which they are stuck with a high-cost 401(k) for so many years that they are better off with taxable investments.)

For an early retiree it can have an impact on health insurance costs though, no?

If you are in the ACA subsidy range, the reduced subsidy is effectively an increase in your marginal tax rate (on both IRA withdrawals and long-term capital gains). However, in order to get that subsidy, you must have low enough income to be in a low tax bracket, so your marginal tax rate is still relatively low.

It would be unlikely to retire early and have all of your taxable investments showing long term capital gains, anyway, since it’s typical to have your best earning years right before you retire. Especially since most is us start out using equities in tax deferred accounts, and then as our wealth and income get larger we often make a shift to holding bonds in tax deferred and have our taxable be more-or-less entirely equities.

I believe you mean, "and have all of your taxable investments showing significant long-term capital gains." Any taxable account which is buy-and-hold invested in stock will have small capital gains or losses for stock bought in the first year, and long-term gains for other purchases, but the long-term gains on stock purchased a few years ago will likely be relatively small.

In theory, this does decrease the important of taxable versus tax-deferred investing immediately before you retire. If you contribute $1000 to a 401(k) in a 22% bracket rather than $780 to a taxable account, and then withdraw it a year later in the same 22% bracket, your benefit is only the difference between the tax-free and taxable growth on $780. However, the years immediately before you retire are also likely to be your highest-earning years, and thus the years in which you get the greatest tax benefit from contributing to a 401(k) at a higher marginal tax rate than you withdraw.

[sailaway]

I’d rather have a pile of money in lt cap gains taxable than the same pile of money in tax deferred.

While this is true, it isn't the right comparison, because it cost less to get the money in the tax-deferred account. If you are in the 22% tax bracket, it costs you only $780 out of pocket to put $1000 in your 401(k), and $1000 in a 401(k) is better than $780 in a taxable account. (Early retirees aren't likely to be in the uncommon situation in which they are stuck with a high-cost 401(k) for so many years that they are better off with taxable investments.)

For an early retiree it can have an impact on health insurance costs though, no?

If you are in the ACA subsidy range, the reduced subsidy is effectively an increase in your marginal tax rate (on both IRA withdrawals and long-term capital gains). However, in order to get that subsidy, you must have low enough income to be in a low tax bracket, so your marginal tax rate is still relatively low.

Many early retirees rely on the income from Roth conversions to get them up to the lower level that makes them eligible for subsidies. It just depends on how much you spend and what lots you have available in your taxable account.

[02nz]

I’d rather have a pile of money in lt cap gains taxable than the same pile of money in tax deferred.

While this is true, it isn't the right comparison, because it cost less to get the money in the tax-deferred account. If you are in the 22% tax bracket, it costs you only $780 out of pocket to put $1000 in your 401(k), and $1000 in a 401(k) is better than $780 in a taxable account. (Early retirees aren't likely to be in the uncommon situation in which they are stuck with a high-cost 401(k) for so many years that they are better off with taxable investments.)

Thank you for pointing that out. I really take issue with a certain poster's signature: "A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account." True, but can be very misleading if taken as advice.

[faanger101]

It depends theoretically what tax bracket you are in now and what you'll be when you retire.

That's a very big unknown - I have no clue what tax law would look like when I retire

[faanger101]

I’d rather have a pile of money in lt cap gains taxable than the same pile of money in tax deferred.

While this is true, it isn't the right comparison, because it cost less to get the money in the tax-deferred account. If you are in the 22% tax bracket, it costs you only $780 out of pocket to put $1000 in your 401(k), and $1000 in a 401(k) is better than $780 in a taxable account. (Early retirees aren't likely to be in the uncommon situation in which they are stuck with a high-cost 401(k) for so many years that they are better off with taxable investments.)

For an early retiree it can have an impact on health insurance costs though, no?

If you are in the ACA subsidy range, the reduced subsidy is effectively an increase in your marginal tax rate (on both IRA withdrawals and long-term capital gains). However, in order to get that subsidy, you must have low enough income to be in a low tax bracket, so your marginal tax rate is still relatively low.

It would be unlikely to retire early and have all of your taxable investments showing long term capital gains, anyway, since it’s typical to have your best earning years right before you retire. Especially since most is us start out using equities in tax deferred accounts, and then as our wealth and income get larger we often make a shift to holding bonds in tax deferred and have our taxable be more-or-less entirely equities.

However, the years immediately before you retire are also likely to be your highest-earning years

That's something I do not really follow. Typically RE public spend last few years working part time / reduced hours etc

[faanger101]

Hello all and thank you for running such a great community!
I recently started a job which allows Mega Roth. I got the following theoretical question - is there any table that shows optimal retirement/taxable savings ratio for different planned retirement ages?
For example, I assume if I'd like to retire at 70 it's good to have 100% funds in tax advantage retirement accs but if I want to retire at 25 I should have pretty much everything in regular accs.

Just max out mega back door Roth and then push the rest to taxable. Why would you care about the ratio? If you have high saving rate, you should end up with much more taxable account compared to tax advantaged account

Nope, if I choose Mega back door I'll have like 5-10k left annually for taxable

[dboeger1]

One thing I've recently stumbled upon in planning long-term college savings for our baby is that many (most?) universities exclude retirement accounts and primary residence from parental assets for the purpose of calculating financial aid. This is yet another incentive to max out retirement accounts if you have kids. Granted, it's a little bit complicated, because you don't necessarily want to buy a bigger house just to avoid paying some tuition, and you may still need enough to cover costs depending on aid eligibility, but still, I think it's almost always best to max out tax-advantaged space. The single biggest exception would be saving to buy a home, both because it has different (perhaps preferable) financial characteristics and it may be the right lifestyle choice depending on your personal goals and needs. Beyond that, you generally only get so much tax-advantaged space annually, and there are ways to withdraw it later without too much cost, so there's not much sense in giving that up, even for early retirement.

[celia]

The usage of “retirement accounts” means different things to different people. It is lumping together two types of accounts that are (taxable) opposites of each other: Roth and Tax-deferred.

The best ratio anyone can have is 100/0/0 for Roth/Tax-deferred/Taxable.

[dcabler]

Like so many topics in investing, what's theoretically "best" (100% Roth and HSA if eligible) and what's practically possible for any individual investor aren't necessarily the same thing.

What I do today
- Max out tax advantaged accounts each year: 401K, HSA, and I-bond purchases
- Taxable brokerage account receives a regular monthly deposit from my paycheck and proceeds from annual corporate bonus, ESPP, and RSU's

There is no target. It is what it is. And all accounts are for retirement whether they're tax advantaged or not. I had to look but today it's 56% tax advantaged, 44% Taxable. So far this has allowed me to keep all of my bond holdings in tax advantaged accounts. Taxable is all stocks. And there are some stocks in the tax advantaged accounts as well. It's worked out such that any rebalancing needed can be dealt with wholly within the tax advantaged space.

Post-retirement (very soon) Roth conversions will begin. Doubtful I will be able to get to 100% Roth+HSA

Cheers.

[Chip]

The best ratio anyone can have is 100/0/0 for Roth/Tax-deferred/Taxable.

Only if you fail to consider the cost of getting to that state. Which would be ludicrous.

[HomeStretch]

Just max out mega back door Roth and then push the rest to taxable. Why would you care about the ratio? If you have high saving rate, you should end up with much more taxable account compared to tax advantaged account

Nope, if I choose Mega back door I'll have like 5-10k left annually for taxable

Welcome to the forum!

For retirement savings, prioritize a mega backdoor Roth up to the IRS limit over contributing to a Taxable account. You contribute after-tax dollars to both. But the Roth account will grow tax free whereas the Taxable will not. This BH wiki page may be helpful:
https://www.bogleheads.org/wiki/Mega-backdoor_Roth

[faanger101]

One thing I've recently stumbled upon in planning long-term college savings for our baby is that many (most?) universities exclude retirement accounts and primary residence from parental assets for the purpose of calculating financial aid. This is yet another incentive to max out retirement accounts if you have kids.

Thank you, that's really helpful!

[celia]

The best ratio anyone can have is 100/0/0 for Roth/Tax-deferred/Taxable.

Only if you fail to consider the cost of getting to that state. Which would be ludicrous.

I disagree! All it takes is contributing or converting a little to Roth every year when working as well as during your early retirement years. Converting when markets were down 50% in 2008 helped us a lot. It was like paying half price on the Roth conversion taxes, when the funds returned to their full value. And Roth IRAs didn’t even exist until halfway through our careers!

Then we QCDed tax-deferred after 70.5 and used Taxable to pay the taxes and gift or spend the rest. Meanwhile, we live on pensions and SS after age 70. (You could use fixed annuities instead if you don’t have pensions.) Our retirement expenses are about half of what they were when working since we no longer have a mortgage, kids are now self-supporting (done with K-12 and college tuition) and our Roths are already well funded.


Along the way, we also spent a lot of tax-deferred and Taxable to buy “extra years of service credit” which made the pensions bigger.

We’re almost there! Along with making our financial lives simpler, we still have a little ways to go.

[kenyan]

For example, I assume if I'd like to retire at 70 it's good to have 100% funds in tax advantage retirement accs but if I want to retire at 25 I should have pretty much everything in regular accs.

Keep in mind that early retirement also includes 'regular' retirement. You're still going to fund those 59.5+ years. Even ignoring the various methods for getting money out of retirement accounts before 59.5, there isn't a good reason not to have dollars to fund your 'regular' retirement in those tax-advantaged accounts.

Of course, I also wouldn't ignore the methods for getting money out early (e.g. Roth conversion ladder, SEPP, Roth contribution withdrawals, HSA, etc).

[Chip]

The best ratio anyone can have is 100/0/0 for Roth/Tax-deferred/Taxable.

Only if you fail to consider the cost of getting to that state. Which would be ludicrous.

I disagree! All it takes is contributing or converting a little to Roth every year when working as well as during your early retirement years.

Are you seriously suggesting that one should ignore the tax cost of Roth conversions and convert all tIRAs to Roths?

[kleiner]

Like so many topics in investing, what's theoretically "best" (100% Roth and HSA if eligible) and what's practically possible for any individual investor aren't necessarily the same thing.

What I do today
- Max out tax advantaged accounts each year: 401K, HSA, and I-bond purchases
- Taxable brokerage account receives a regular monthly deposit from my paycheck and proceeds from annual corporate bonus, ESPP, and RSU's

There is no target. It is what it is. And all accounts are for retirement whether they're tax advantaged or not. I had to look but today it's 56% tax advantaged, 44% Taxable. So far this has allowed me to keep all of my bond holdings in tax advantaged accounts. Taxable is all stocks. And there are some stocks in the tax advantaged accounts as well. It's worked out such that any rebalancing needed can be dealt with wholly within the tax advantaged space.

Post-retirement (very soon) Roth conversions will begin. Doubtful I will be able to get to 100% Roth+HSA

Cheers.

This is exactly the situation in my household. Both my wife and I were high earners for over twenty five years (I am retired and my wife is still working). We have always maxed out our respective 401Ks. We still had a lot of money left in savings and have been investing the surplus, mostly in index funds, in our taxable brokerage account.

As it stands right now, we have about the same amount in taxable accounts as we do in our tax deferred accounts. This ratio of tax deferred to taxable was not by intent - just the result of a lot of savings over the years.

[faanger101]

The best ratio anyone can have is 100/0/0 for Roth/Tax-deferred/Taxable.

Only if you fail to consider the cost of getting to that state. Which would be ludicrous.

I disagree! All it takes is contributing or converting a little to Roth every year when working as well as during your early retirement years.

Are you seriously suggesting that one should ignore the tax cost of Roth conversions and convert all tIRAs to Roths?

My friend is serious about it - he believes taxes will be so high at his retirement age that he wants to 'prepay' it right now

[Chip]

My friend is serious about it - he believes taxes will be so high at his retirement age that he wants to 'prepay' it right now

I suggest your friend not rely on gut feel and actually run some numbers. If he's a long way from retirement the numbers will be extremely squishy, but he can update them each year. He can make a variety of assumptions about tax law changes, investment returns and savings growth.

Just make sure your friend understands the asymmetric risk of prepaying taxes. If he saves a lot, gets great investment returns, works a long time and tax rates increase, prepaying will have been the right move. But in that scenario he'll have so much money in retirement that it won't matter how much he has to pay in taxes.

But then flip it around: he gets divorced and loses half of assets, investment returns stink, tax rates decline and he can't work past age 50. In that scenario he will likely be facing a tax rate near zero after his working career yet he will have prepaid those taxes at high rates. And he can't get those prepaid taxes back when he really needs them.

[radiowave]

I agree with above to consider maxing out tax deferred at least to the maximum of the employer contribution. There is also a practical limitation to how much you can contribute to tax deferred each year. At a certain income level, all tax deferred will be maxed out so only options will be taxable.

[faanger101]

My friend is serious about it - he believes taxes will be so high at his retirement age that he wants to 'prepay' it right now

I suggest your friend ...

Just make sure your friend ...

Well, if he ever asks my advice I'll definitely follow this script

[faanger101]

I agree with above to consider maxing out tax deferred at least to the maximum of the employer contribution.

Thank you !

[FiveK]

See also the suggestions in the Prioritizing investments wiki. Again the ratios will be a result, not a target.

[celia]

Are you seriously suggesting that one should ignore the tax cost of Roth conversions and convert all tIRAs to Roths?

Taxes will be due when the money is withdrawn from tax-deferred, either now or later. I choose to pay the taxes when I’m in a lower tax bracket, either now or later. And I showed several ways you can “spend” the tax-deferred, either now or later (Roth conversions—especially when taxes are half-price, buying extra pension (or annuity) benefits, QCDs).

Now, we’re in the “later” phase, since we are retired.

And we didn’t even have all the options you have these days. Roth IRAs weren’t “invented” until 1997.