The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: maryofdoom on April 06, 2014, 11:56:28 AM
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Hello, friends. Once again, I have a lot to think about, and I can't really ask anyone in my real life for their advice, because they are well-meaning, but would be incredulous instead of helpful.
The husband and I will pay off our house in a few months -- it all depends on when the last $2,000 check from the book project arrives in the mail. Once that is here, though, it's payoff statements and gleeful cackling while rubbing my hands together.
I started a new job at the beginning of the year. Normally, at my company, one needs to wait a year before joining the 401K program; I managed to negotiate to begin contributing much sooner, in July of this year. Again, gleeful cackling is in order.
Obviously I will be contributing enough to make the company match, which is 5% of my salary to have them contribute 1.5%. I make $52k per year, while the husband makes $50k per year. We're 31 and 33, respectively.
Now, the thing is, I've seen a lot of recommendations for why one should contribute up to the legal maximum amount per year, which is $17,500. That's awesome, and it has the bonus of reducing one's income, which is nice.
However, due to previously working at a university with a generous 403B program, and through prudent saving and investment, we have the following retirement accounts, which have the following rough amounts in them:
$53K in my old 403B plan, which is at Vanguard; I've been very pleased with its performance and have seen no reason to move it yet)
$21K in the husband's company's 401K plan, through ING
$41K in my traditional IRA
$14K in a Roth IRA for my husband (both of these last two are invested with RBC Dain Rauscher, which is my parents' investment firm)
All told, we have about $129K in these various retirement accounts. And for where we are in our lives, I think that is pretty darn good.
I guess the real question here is, Are we good on our retirement accounts?
I know it's important to invest for retirement. But after finding the Mustachian way, the traditional notion of retiring at age 65+ is out the window. I do want to continue contributing to the traditional and Roth IRAs, and setting up my 401K to get the company match is also a no-brainer. But I wonder if it's really all that important for the husband and I to reduce our taxable income by contributing more to accounts that we can't access until we're older, given the contributions that we've already made. Wouldn't we do better by investing in things that will allow us to access our money before we're 70?
What do you think, my friends? I certainly don't need to decide anything anytime soon; the house payoff date is at least a month away, if not longer. I'm mostly just thinking through my options.
More information is, as always, available for the asking; if there's something here that you need to know that I haven't adequately explained, ask away.
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Congrats on the soon to be paid off house and the new job!!!
I remember reading that your old job changed from work from home to presence and how you did not like that. Good for you that you took your consequences and moved on to something that sounds like a better fit!!
Regarding retirement accounts, I would still take the reduced tax if your options in the 401 K are great.
There's a lot of talk on the forums on Roth Pipeline strategies and the general concensus seems to be
that if you have good options in your 401 K use that (you can always do a pipeline strategy later) and if your 401 K sucks to just contribute to the max.
https://forum.mrmoneymustache.com/ask-a-mustachian/help-me-understand-the-roth-conversion-pipeline-idea-and-its-benefits/
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
http://jlcollinsnh.com/2013/06/28/stocks-part-viii-b-should-you-avoid-your-companys-401k/
https://forum.mrmoneymustache.com/ask-a-mustachian/tax-minimization-strategy/
http://www.madfientist.com/retire-even-earlier/
There's a ton more threads out there if you just look for Roth Pipeline etc.
Hope that helps!
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Congratulations on nearly paying off your house!
On the other hand, I know you are feeling happy with how you have saved so far, but you don't really have that much money invested for retirement yet. Keep maxing those accounts if you can to minimize the taxes you pay. You should also start a Roth in your own name and max that as well.
FrugalZony is right: You can always use a Roth ladder if you need the money earlier than age 55. Once you both have your Roths set up, then this money is not as "locked away" as you think. Don't just rely on your other half's Roth for this: start your own this year.
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The biggest benefit to retirement accounts is arbitrage between your earning years' tax rate and your retirement years' tax rate.
For most people, I think that it makes sense to contribute to the 401k until you reach the border of the 25% federal tax bracket. When you are in retirement (and have little income), you can slowly roll that money out to roth IRAs and then to non-advantaged accounts at very low tax rates.
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When do you plan to retire? My first instinct is no, you need a lot more in there. And you can assess retirement accounts way before 70.
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.... and if your 401 K sucks to just contribute to the max.
That was supposed to say "contribute to get the match"
sorry!
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Conventional wisdom is to fill up your tax-advantaged accounts before investing elsewhere (certain exceptions apply). This would be up to $17.5k in 401k and $5.5k in IRAs per person. As others have pointed out, the Roth pipeline can provide access to some of these funds before retirement age (59.5).
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Well, I put together an excel spreadsheet to see what that $129k would conservatively grow to, by the time you're 59 1/2 and able to access it, assuming:
1. You never get any raises
2. You continue to put in the 5% of your current salary plus 1.5% match (a total of $3380/year)
3. It grows at a conservative 5% rate.
It gets you to $741, 632, which will give you a 4% safe withdrawal of just shy of $30k.
Now, obviously if you RE, you won't continue to put that money into your 401K for all 28 years. But even so, the other assumptions are conservative.
So I would say it depends on what your plans are for pre-59 1/2.
Are you just going to save up a bucket that will be used up at 59 1/2? If so, I would want more in post-59 accts.
Are you going to buy a few rental properties that will forever kick off income?
Or are you planning to build another whole stache for pre 59 1/2 in taxable accts?
Taxes is the other big issue. At your income level, you'll most likely be in the 28% bracket. I would at least put enough into tax deferred accts to get to the 15% bracket, which will also help . But I am writing 5-figure tax checks next week, so figuring out how to minimize taxes has suddenly become very important to me.
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Oh, andin the zeal of putting together the spreadsheet I forgot to say congratulations.
You really are in a fabulous position. Well done.
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Well, I put together an excel spreadsheet to see what that $129k would conservatively grow to, by the time you're 59 1/2 and able to access it:
It gets you to $741, 632, which will give you a 4% safe withdrawal of just shy of $30k.
25+ years of inflation will make that 30k pretty insignificant, too.
OP: You need to know approximately what your spending on retirement will be before you know what is enough. My hunch is that you have a ways to go yet before stopping contributions.