Author Topic: “How Much is TOO MUCH in your 401(k)?”  (Read 4198 times)

ikea4532

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“How Much is TOO MUCH in your 401(k)?”
« on: October 10, 2013, 08:18:41 AM »
Okay, here is my situation. If I place any money into my 401K for the 15 years + until I retire, with how my calculations look from other investments; I WILL make more money then I currently am, so saving in the lower return 401K to me I think it does not calculate. Am I missing something here? my calculations are:
Current pay: $47,000 gross 15 years with state job my ending salary is most likely going to be around $65,000
At 15 year savings INT: $69,000

Basically I will be in a higher tax rate than I am now. Please help enlighten me!

matchewed

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Re: “How Much is TOO MUCH in your 401(k)?”
« Reply #1 on: October 10, 2013, 08:56:20 AM »
It's what your retirement income will be. Do you really expect your retirement income to be more than your current or future income? I doubt it and wouldn't recommend it if I was advising a friend.

When you're calculating these figures you're looking at it this way.

Present Income                              Future Income                                          Retirement Income
47k                                                      65k                                                           ??

That ?? is what matters when looking at whether you should invest in your 401k. This is quite simplified as it is more based on your taxable income during Retirement which may be more or less depending on your various accounts and deductions, but the 401k saves you so much in current times that it is very much worth it.

http://www.madfientist.com/retire-even-earlier/ for more in depth analysis over why tax deferred accounts rock.

ikea4532

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Re: “How Much is TOO MUCH in your 401(k)?”
« Reply #2 on: October 10, 2013, 11:51:14 AM »
I have to disagree with you; my 401K is barely making a 6% ROR from last statement; my outside investment are making 15.8% annualized ROR, even if I safely put my outside investments to an 8% ROR, which I have seen many people use this as a safe % ROR because even I know 15.8% is shocking and will not last. Using how much I place in each month of $925 for 15 years, monthly. I will make $69K the 16th year. That is over my ending potential salary of 65K. This also gets me to my ultimate safe retirement number of $700K I think it will be $9K short but I already have $35k in my 401K, I receive no match.
Also, note that I will receive a pension of around $1700 a month. I am just thinking the money I save on taxes now will be all for not 30 years from now when I do not know how high or low the tax rate will be. As your article states you can only safely transfer around $9k from a 401K to a roth IRA. What happens to the other $20K+ I need to live on for a year? It will be all taxed.

In thinking about and writing this response, you are only taxed on what you take out of the 401K, not any accumulated interest earned... Just what you take out is taxed in a 401K where as the outside investment the interest is taxed yearly, so if I make $69K in outside investments that is taxed. If I only take out $30K from the 401K I will only have a $20K taxable amount after the $9k transfer amount. Maybe I am overly cautious with my $700k FI figure?

catccc

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Re: “How Much is TOO MUCH in your 401(k)?”
« Reply #3 on: October 10, 2013, 12:03:34 PM »
Can't you change what you invest in for the 401K to get better returns?  You are talking about 401K v. outside investments, but these are just vehicles for investments, not the investments themselves, right?

Can you access the pension after 15 years?

matchewed

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Re: “How Much is TOO MUCH in your 401(k)?”
« Reply #4 on: October 10, 2013, 01:04:59 PM »
I have to disagree with you; my 401K is barely making a 6% ROR from last statement; my outside investment are making 15.8% annualized ROR, even if I safely put my outside investments to an 8% ROR, which I have seen many people use this as a safe % ROR because even I know 15.8% is shocking and will not last. Using how much I place in each month of $925 for 15 years, monthly. I will make $69K the 16th year. That is over my ending potential salary of 65K. This also gets me to my ultimate safe retirement number of $700K I think it will be $9K short but I already have $35k in my 401K, I receive no match.
Also, note that I will receive a pension of around $1700 a month. I am just thinking the money I save on taxes now will be all for not 30 years from now when I do not know how high or low the tax rate will be. As your article states you can only safely transfer around $9k from a 401K to a roth IRA. What happens to the other $20K+ I need to live on for a year? It will be all taxed.

In thinking about and writing this response, you are only taxed on what you take out of the 401K, not any accumulated interest earned... Just what you take out is taxed in a 401K where as the outside investment the interest is taxed yearly, so if I make $69K in outside investments that is taxed. If I only take out $30K from the 401K I will only have a $20K taxable amount after the $9k transfer amount. Maybe I am overly cautious with my $700k FI figure?

You can disagree with me all you want about your returns because I don't know what you invest in. What I do know is that all things being equal (meaning returns, fees, and amount put in) investing in tax deferred is superior to post tax. You can talk about potential returns but maybe you just have piss poor choices in your 401k. But you didn't ask that question. You asked whether you should invest in your 401k or not and that answer hasn't changed because you can't guarantee what returns you will get.

Your tax rate now is calculated by how much you earn minus deductions and things like tax deferred investment vehicles. Your tax rate post FIRE is just your taxable income. The power of the tax deferred vehicle now is that you can put off taxes and game your various investment vehicles for tax efficiency (meaning you can withdraw from various buckets to reduce your taxable income). If you don't use a tax deferred vehicle you are pigeon holing your taxable income into one area (traditional taxable account and dividend taxes [if applicable]). You are at more risk by using solely a taxable account to the changes in tax structures since if the tax laws change to not be in your favor you are going to be more adversely affected than someone who has more tax diversified investment vehicles.

The article I linked is talking about how tax deferred accounts allow you to accumulate your FIRE money faster and the one take away you have is a misunderstanding on how to perform a Roth pipeline? If you have Roth money already you could convert 9k or 5k or Xk for all I care annually. Your situation and particular strategy will be unique to your plan if you choose to use a Roth pipeline.

Also current taxation structure for a taxable investment account is capital gains and dividend taxes. These also get taxed at withdrawal much like an IRA would (replace 401k with IRA as if you FIRE you'll be rolling your 401k into an IRA). It's just that the tax rules will be different in the future.

I'm not saying don't invest outside of your 401k, I'm saying your base answer to "how much is too much in your 401k" is a bad question as you should max your 401k, or rather the too much is however much more than the federally allowed maximum or plan maximum. You seem to believe you can make more money outside of it due to your current experience of returns, that is a fallacy, you can't guarantee those returns. I can guarantee that you will enjoy having tax flexibility come FIRE as that will allow you to weather various scenarios in the future.

I'm also happy to see someone so confident in how much their investments will make in 15 years. Can I subscribe to your crystal ball?

marty998

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Re: “How Much is TOO MUCH in your 401(k)?”
« Reply #5 on: October 10, 2013, 02:38:31 PM »
Dow up 2% today. Sometimes it really is a matter of when you are invested!

ikea4532

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Re: “How Much is TOO MUCH in your 401(k)?”
« Reply #6 on: October 11, 2013, 07:37:32 AM »
Your tax rate now is calculated by how much you earn minus deductions and things like tax deferred investment vehicles. Your tax rate post FIRE is just your taxable income. The power of the tax deferred vehicle now is that you can put off taxes and game your various investment vehicles for tax efficiency (meaning you can withdraw from various buckets to reduce your taxable income). If you don't use a tax deferred vehicle you are pigeon holing your taxable income into one area (traditional taxable account and dividend taxes [if applicable]). You are at more risk by using solely a taxable account to the changes in tax structures since if the tax laws change to not be in your favor you are going to be more adversely affected than someone who has more tax diversified investment vehicles.

The article I linked is talking about how tax deferred accounts allow you to accumulate your FIRE money faster and the one take away you have is a misunderstanding on how to perform a Roth pipeline? If you have Roth money already you could convert 9k or 5k or Xk for all I care annually. Your situation and particular strategy will be unique to your plan if you choose to use a Roth pipeline.

Thanks for the punch in the face.