Author Topic: Max out retirement and covering part of expenses with savings?  (Read 3122 times)

CCCA

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Max out retirement and covering part of expenses with savings?
« on: November 18, 2014, 11:23:57 AM »
My family lives in the high-cost Bay Area and we spend about $100k per year on everything, housing is about 40%, child care 20%, and 40% for everything else.  This year, we'll make about $180K including my wife's 403b match.  We are 40 with 2 small children.

We are thinking of going part time (maybe between 66% and 75% in the next year or so.  That would take our salaries to about $140k.  The question has to do with whether or not to max out our retirement savings in the next few years. 

If we max out our Roth IRAs ($11000) and 403b (2 of them) and 457b (1 of them) we could contribute $63500.  But then our salaries would not cover our expenses.  However we have about $500k in taxable accounts that could be used to pay the deficits.  We also have $700k in retirement accounts. In the past we have not maxed out our contributions to retirement to make sure that we can cover our expenses and our taxable accounts have grown as a result, but I'm wonder if it makes sense to send the taxable accounts on expenses and max out our tax-advantaged retirement accounts. 

The main confounding issue is that we are planning to retire in 3-6 years (probably sooner for me and later for my wife).  I've read through some forum topics about whether to max out retirement when we are so close to retirement, but I'm not sure if these circumstances are different or not.  Unfortunately, for most of my career, I've been maxing out the 403b and not the 457b since we had not really thought about RE. 

Anyway, I think it maybe makes sense on paper to do this, but I'm wondering if there are any downsides to this or things that I should be aware of.  I think having flexibility is important so I'm a little worried that sticking everything into retirement accounts even though one is a 457b might cause problems in retirement.

thanks!

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Re: Max out retirement and covering part of expenses with savings?
« Reply #1 on: November 18, 2014, 12:32:36 PM »
Nice job on the 'stache!

Your strategy seems to make sense.  I would try to sell off your taxable assets in a manner that does not create a lot of capital gains, as your cap gains rate will most likely be lower in retirement as well. Take a close look at the various methods of determining cost basis, using the specific shares method will probably allow you to generate the least gains, by selling the most recently shares purchased.

That 40k a year for housing, is that mortgage payments?  Or rent?  If it is mortgage, are you planning on paying it off before retirement?  How much taxes and insurance will be left?  Or do you plan on moving? 

Cheddar Stacker

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Re: Max out retirement and covering part of expenses with savings?
« Reply #2 on: November 18, 2014, 12:52:41 PM »
I would max out everything you can to decrease taxable income. You might even be able to switch from Roth IRA to T.IRA if you max out the other 3 accounts after reducing your income from PT work. You income is too high (good problem to have) so you need to decrease it as much as possible now while you are still working.

CCCA

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Re: Max out retirement and covering part of expenses with savings?
« Reply #3 on: November 18, 2014, 12:55:06 PM »
Nice job on the 'stache!

Your strategy seems to make sense.  I would try to sell off your taxable assets in a manner that does not create a lot of capital gains, as your cap gains rate will most likely be lower in retirement as well. Take a close look at the various methods of determining cost basis, using the specific shares method will probably allow you to generate the least gains, by selling the most recently shares purchased.

That 40k a year for housing, is that mortgage payments?  Or rent?  If it is mortgage, are you planning on paying it off before retirement?  How much taxes and insurance will be left?  Or do you plan on moving?

Thanks, the housing costs are about 2/3 mortgage, and the rest is taxes, insurance, maintenance, and utilities.  But the mortgage won't go away for about 25 years. 

In terms of taxes, your suggestions about cost basis are helpful.  The main reasons for doing this are essentially to reduce our current income taxes and take advantage of tax free growth.  However, we would be saving some income taxes on our salaries but increasing capital gains taxes.  But overall, I think it still makes sense to do this, given the ability to grow the money tax free (until withdrawal) and as you point out, our tax rate during retirement won't be higher than it is now.   

CCCA

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Re: Max out retirement and covering part of expenses with savings?
« Reply #4 on: November 18, 2014, 02:53:46 PM »
I would max out everything you can to decrease taxable income. You might even be able to switch from Roth IRA to T.IRA if you max out the other 3 accounts after reducing your income from PT work. You income is too high (good problem to have) so you need to decrease it as much as possible now while you are still working.

Yes, it's a good problem to have.  I hadn't really thought about a traditional IRA.  What is the thinking behind that vs the Roth in this circumstance?

Cheddar Stacker

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Re: Max out retirement and covering part of expenses with savings?
« Reply #5 on: November 18, 2014, 02:58:59 PM »
I would max out everything you can to decrease taxable income. You might even be able to switch from Roth IRA to T.IRA if you max out the other 3 accounts after reducing your income from PT work. You income is too high (good problem to have) so you need to decrease it as much as possible now while you are still working.

Yes, it's a good problem to have.  I hadn't really thought about a traditional IRA.  What is the thinking behind that vs the Roth in this circumstance?

Greater tax reduction while you are still working. This leads to more savings. After you are done working it can be slowly converted to Roth while paying 10% or 15% tax instead of your current 25% or 28% marginal rate.

Check this guy out if you haven't already, he's pretty active on this forum as well:
http://rootofgood.com/make-six-figure-income-pay-no-tax/

This should sound familiar. 403b + 457 = opportunity.

CCCA

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Re: Max out retirement and covering part of expenses with savings?
« Reply #6 on: November 18, 2014, 03:09:10 PM »

Greater tax reduction while you are still working. This leads to more savings. After you are done working it can be slowly converted to Roth while paying 10% or 15% tax instead of your current 25% or 28% marginal rate.

Check this guy out if you haven't already, he's pretty active on this forum as well:
http://rootofgood.com/make-six-figure-income-pay-no-tax/

This should sound familiar. 403b + 457 = opportunity.

Ah yes, that makes sense.  Can't do it this year, because I've already contributed to the Roth but will read up more about the Trad. IRA vs Roth and consider this for next year. 

And thanks for the rootofgood blog.  I hadn't heard of him and the post (I just skimmed it so far) looks great.  Okay, I probably should get back to work now!  ;)


Cheddar Stacker

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Re: Max out retirement and covering part of expenses with savings?
« Reply #7 on: November 18, 2014, 03:21:47 PM »
If you want, and you would qualify for T.IRA contributions based on your MAGI, you can have the contributions "re-characterized" from Roth to Traditional. You likely make too much for this right now, but worth looking into.