Author Topic: Do you ever stop putting money in tax sheltered retirement account?  (Read 4677 times)

aperture

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Hello mustachios,

I am a newbie to the site and to the FIRE community.  My wife and I have been maxing our 403B contributions for years and we now have ~$840K in retirement accounts.  I am 53 and will be able to access my retirement account in 6 years.  My wife is 42.  We have two kids that will be going to college in 5 and 7 years and we plan to fund state school education.  We have around $40K in education accounts.  We have virtually no cash on hand and have just opened a taxable savings account with Vanguard but with only $1500.  We are in the midst of a fast-180 on spending after encountering the gospel of the triple M.  Having had only a single strategy for saving for the last 15 years, we are kind of lopsided.  I am thinking of stopping all contributions to the 403B accounts and instead putting all our savings into both paying off the $220K remaining mortgage (at 2.75%) as well as into the taxable Vanguard account.  My question for you all is whether it makes sense to stop contributing to the tax-sheltered accounts with a goal of creating more accessible accounts and to quickly get out from under the mortgage.  My thought is that if we had the house paid off and some accessible funds, we would be in a much more flexible position to walk away from work.  TIA for your thoughts. 

johnny847

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #1 on: July 09, 2015, 09:36:26 PM »
Increasing your mortgage payments will have the opposite effect. You're now putting that money into home equity, which is not easily tapped (unless you open a HELOC...but then you're paying an interest rate higher than your mortgage). You've just decreased your liquidity, not increased it.

And as for accessibility of funds...http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
URL says only IRA and 401k, but it applies to 403B's also.

You don't by any chance have access to a 457b do you?

MDM

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #2 on: July 09, 2015, 10:24:28 PM »
Increasing your mortgage payments will have the opposite effect. You're now putting that money into home equity, which is not easily tapped (unless you open a HELOC...but then you're paying an interest rate higher than your mortgage). You've just decreased your liquidity, not increased it.

And as for accessibility of funds...http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
URL says only IRA and 401k, but it applies to 403B's also.

You don't by any chance have access to a 457b do you?
+1

See http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/ for more than you may want to peruse on the subject.  One of the posts in that thread:
Nope, I don't understand.  Not saying you are wrong (and I have not followed this whole thread!) but why don't I need to make the interest portion of my mortgage payment after I retire?
Good question!  Assuming you continue to pay monthly, you absolutely do continue to make the interest portion of the mortgage payment.  But let's review the assumptions:
You start your retirement with amount E/SWR + B, where
   E = Expenses in Retirement
   SWR = Safe Withdrawal Rate (e.g., 4%)
   B = Remaining mortgage balance (i.e., the unpaid principal)

1) You could simply take the amount B and pay off the mortgage, or
2) You can leave amount B invested.  Because it pays you a higher return than you pay on the mortgage, you have more than enough to cover the P+I payments each month.

E.g., a $100K mortgage at 3.5% over 30 years needs a $449.04 payment each month.  $100K invested with a 7% return gives you $100K*7%/12=$583.33 the first month.  Subtract the $449.04 and you have $100,134.29.  Your investment balance continues to grow while your mortgage balance shrinks. 

That's the math, given the assumptions.

There is the separate issue (as noted many times above, including sirdoug007's recent note) about the risk analysis of "how much of a short term decline can I stand"?

It gets confusing when we have both "What's the math?" and "What's the risk?" discussions at the same time.  Make sense?

aperture

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #3 on: July 10, 2015, 03:23:57 AM »
Thanks MDM and johnny847, I really appreciate your thoughts.  Our desire to pay down the mortgage is definitely irrational, and I get that we would be moving money into the worst possible investment. http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/.  I think we came up with that part of the plan when we had a work scare that touched us both at once - we realized with cold sweat how dependent we have made ourselves on a steady money stream from employment to meet this commitment every month.  I hope that as the 5-o-clock shadow grows in, we will start feeling more confident about our ability to meet this commitment with savings and reserves. 

I wonder if you have any thoughts on the other half of my question?  When does it make sense to stop putting money into tax-sheltered retirement accounts?  With the ROTH pipeline outlined, perhaps never?  Again, I am soooo grateful for your wisdom.  Many thanks, aperture.

johnny847

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #4 on: July 10, 2015, 06:06:28 AM »
I mean some people just don't like holding onto debt. And that's a perfectly fine reason to pay down your debts early. I was just pointing out that if your goal if liquidity, paying down your mortgage at faster than the minimum required isn't going to achieve that.

And yes, because the Roth pipeline is available, unless you need money for the short term (ie, you have some major home repairs, you need to replace your car, etc) you shouldn't stop using retirement accounts.

MandyM

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #5 on: July 10, 2015, 06:26:15 AM »
When do you plan on retiring from your job? There are instances where you can pull withdraw money from a 403B at 55, but only if you have retired at 55 or later:

"The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions made from a qualified governmental defined benefit plan if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50."

(from http://www.irs.gov/taxtopics/tc558.html, emphasis mine)

Vertical Mode

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #6 on: July 10, 2015, 08:26:54 AM »
Increasing your mortgage payments will have the opposite effect. You're now putting that money into home equity, which is not easily tapped (unless you open a HELOC...but then you're paying an interest rate higher than your mortgage). You've just decreased your liquidity, not increased it.

And as for accessibility of funds...http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
URL says only IRA and 401k, but it applies to 403B's also.

You don't by any chance have access to a 457b do you?
+1

See http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/ for more than you may want to peruse on the subject.  One of the posts in that thread:
Nope, I don't understand.  Not saying you are wrong (and I have not followed this whole thread!) but why don't I need to make the interest portion of my mortgage payment after I retire?
Good question!  Assuming you continue to pay monthly, you absolutely do continue to make the interest portion of the mortgage payment.  But let's review the assumptions:
You start your retirement with amount E/SWR + B, where
   E = Expenses in Retirement
   SWR = Safe Withdrawal Rate (e.g., 4%)
   B = Remaining mortgage balance (i.e., the unpaid principal)

1) You could simply take the amount B and pay off the mortgage, or
2) You can leave amount B invested.  Because it pays you a higher return than you pay on the mortgage, you have more than enough to cover the P+I payments each month.

E.g., a $100K mortgage at 3.5% over 30 years needs a $449.04 payment each month.  $100K invested with a 7% return gives you $100K*7%/12=$583.33 the first month.  Subtract the $449.04 and you have $100,134.29.  Your investment balance continues to grow while your mortgage balance shrinks. 

That's the math, given the assumptions.

There is the separate issue (as noted many times above, including sirdoug007's recent note) about the risk analysis of "how much of a short term decline can I stand"?

It gets confusing when we have both "What's the math?" and "What's the risk?" discussions at the same time.  Make sense?

I agree with these posts. 2.75% is a pretty low interest rate, and in that position I'd pay that off as slowly as possible and leave the money invested elsewhere. johnny847 makes a good point about some people just being allergic to debt, and there is considerable psychological value some people place on being debt-free, but this does run counter to your objectives. No reason to not continue to invest in tax-advantaged accounts, but I would broadly suggest that as you get closer, you move the funds earmarked for education to a more conservative position to be sure they are available when you need them.

Good job amassing the $840k and on making big changes to your spending.

When you say you have "virtually no cash on hand", what is your strategy for an emergency fund/reserve? Will you be funding it with the savings account you mentioned? Is there "springy debt" somewhere?

frugaliknowit

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #7 on: July 10, 2015, 08:45:17 AM »
I would not be "throwing money at the mortgage" until I were comfortable with my cash position (3-12 months expenses).

MDM

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #8 on: July 10, 2015, 09:45:04 AM »
I wonder if you have any thoughts on the other half of my question?  When does it make sense to stop putting money into tax-sheltered retirement accounts?  With the ROTH pipeline outlined, perhaps never?

"Never" does seem as good a one word answer as any.  A slightly longer answer might be "never, once you have satisfied your immediate cash flow needs, emergency fund target, and short term (e.g., 0-3 year) savings target."

You still get to choose between the Traditional and Roth options, but that's another discussion.

NorCal

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #9 on: July 10, 2015, 10:12:56 AM »
I agree to never stop contributing.  However, you might consider allocating some small piece of your savings to taxable accounts.  Here are some considerations:

1.  Having money in a taxable account generally won't be a positive if you're just running spreadsheet numbers.  However, it can provide peace of mind, and it can a lot of flexibility later on.

2.  With $840K in tax advantaged accounts at 53, it's probably a good time to start thinking about tax rates in retirement.  The timing of when you withdraw this money will greatly impact taxes.  Required minimum distributions could hit you pretty hard.  I'd put together a spreadsheet here.  Having taxable (or ROTH) money to tap into at various stages of retirement could give you the ability to minimize your long-term tax burden.  I've never done the math on this myself (too far off for me), but I imagine the impact could be significant.

BarkyardBQ

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #10 on: July 10, 2015, 12:05:41 PM »
You don't by any chance have access to a 457b do you?

I wanted to bring this question back to the OP. It doesn't help with liquidity but it does offer accessible funds while doing the Roth Conversion.

teen persuasion

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #11 on: July 10, 2015, 05:20:19 PM »
How much additional money will be freed up by your "fast 180" on spending?  Enough to build up a decent EF, then add to taxable?  Do you have IRAs, Roth or traditional?  What will your new budget look like, and what is your target for FIRE?

MoonShadow

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #12 on: July 10, 2015, 05:45:33 PM »
I don't know much about a 403b, but do you have a matching amount that you have to contribute to receive additional funds from your employer?  If so, do the match and put the remainder into a standard, taxable brokerage account.  Start your Roth ladder, if you can, and contribute the annual limit for both yourself and your wife, if you feel like it; but any funds you would put towards your mortgage, put into the taxable account.  If push comes to shove, you can liquidate the brokerage account to pay your mortgage off in a lump sum, without encountering the tax bracket hit that you would get by paying your mortgage with a distribution from your 403b.

And yes, you can withdraw qualified distributions from your 403b after age 55 if and only if you separated from that employer most recently and after your 55th birthday.  You can't do this trick to any form of IRA, nor to any employer sponsored retirement account except the most recent employer's plan.  For example, if you have more than one 403b, or a 401k from a previous employer, you cannot withdraw funds from either of those accounts till 59.5 years old, without taking a 10% penalty tax.

aperture

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Re: Do you ever stop putting money in tax sheltered retirement account?
« Reply #13 on: July 11, 2015, 06:42:59 AM »
Thanks for all the great responses. With the 180 in spending, and without changing 403b contributions, we can save at least $2k per month. We are experimenting with life changes to see where is our sweet spot and recording choices to determine what the retirement budget will look like. I think it may take 6 to 12 months to find a new normal (maybe more).
It has been shocking to see how much money has gone through our household because we had no goal for it.
The short term plan is to save an EF (only spring debt is credit cards - all paid off of course) and continue to watch the spending. The change in spending is something that we have to do together, and with our kids and parents. For instance, my daughters routine activities cost ~$250 per month, and we did restaurants to the tune of $500 in the month before we encountered MMM. The restaurants were dinners with my wife's parents and lunches with coworkers and etc.
Not spending on these means looking for suitable alternatives, sometimes having conversations. We are learning.
I am satisfied that we should at least leave my contributions to retirement accounts intact, save an EF followed by taxable savings. Thanks for all your help. -aperture