Save too much for retirement?

[APBioSpartan]

Hello! 

QQ for you mustachians.  My wife and I are 30/29.  We currently have $350,000 saved in our retirements accounts (401k's + Roths) and our net worth is somewhere around 420k.  That said, a quick "back of the napkin" math (I.e., 8.0% annualized return) would project that we should have 5.2mm in our retirement accounts by age 65.  Although it doesn't hurt to save more, what's the motivation to continue maxing retirement accounts vs. putting it all (minus match, of course) in a brokerage account with the intent of using it to pay off a house someday and cover the gap to retirement?  Essentially my question is.... does the benefit of "tax deferred" outweigh the fees and complications of early withdrawl?

[2Birds1Stone]

We have no idea what tax bracket you're in, what your anticipated FIRE date is, or what your goals are.

It's good to have a mix of tax advantaged, tax deferred, and post tax accounts to diversify. If you're completely ignoring certain buckets it could make things difficult to access early later on, or not. It all depends on your income needs in the future, and the tax code.

[DadJokes]

Are you not planning to retire until 65?

[Paper Chaser]

I feel like this thread is probably a good read for you:

https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

[FI45RE]

Are you not planning to retire until 65?

Put another way, are you really planning to work for another 35 years? We would have an estimated $17 million if I worked until 65 (at 8% returns), but I have no interest in working past the next 3-5 years.

[trc4897]

I've been grappling with a similar question. I'm 30, in the 22% tax bracket, and up until now have exclusively contributed to traditional 401k. Through my wife we are able to also do the mega backdoor roth (though this may go away next year). If the mega backdoor roth option goes away, I am considering contributing a 50/50 split - or something close to that, haven't run the math yet - in traditional and roth 401k but still max it out. Besides that, we will still max our Roth IRAs and anything extra would go to a brokerage account.

My reasoning is that we can take out any roth contributions tax and penalty free (once we leave our company and convert the roth 401k to roth IRA). We will have to wait 5 years to take out these contributions (I think?) but we will have enough in a brokerage account by then to live off that for the 5 years. Once we can take out roth contributions, we will start the roth conversion ladder process.

If you want the easier option, it may be better to do what you suggest - just contribute enough to get employer match and contribute the rest to a roth IRA and brokerage account.

[yachi]

If you have sources for 5-years of living expenses outside of retirement accounts, the Roth conversion ladder isn't as difficult to use as lots of other options.  If you notice you are withdrawing too much or not enough, you can adjust it as you see fit.  The only issue is it's 5 years until the changed amount is available for withdrawal.

I'm only a few months away from my FIRE date, but I'm finding myself needing to get creative to start my Roth Conversion ladder.  I definitely advise you keep a good portion stashed away outside of retirement accounts.

It's more comforting to reach FI with 5-years of expenses in a taxable account than it is to reach FI with everything in Roths IRAs and have to figure out how to access your money.  This can happen if you've been funneling everything to tax advantaged accounts, or it can happen if you've been investing differently in each account.

[ixtap]

If you have sources for 5-years of living expenses outside of retirement accounts, the Roth conversion ladder isn't as difficult to use as lots of other options.  If you notice you are withdrawing too much or not enough, you can adjust it as you see fit.  The only issue is it's 5 years until the changed amount is available for withdrawal.

I'm only a few months away from my FIRE date, but I'm finding myself needing to get creative to start my Roth Conversion ladder.  I definitely advise you keep a good portion stashed away outside of retirement accounts.

It's more comforting to reach FI with 5-years of expenses in a taxable account than it is to reach FI with everything in Roths IRAs and have to figure out how to access your money.  This can happen if you've been funneling everything to tax advantaged accounts, or it can happen if you've been investing differently in each account.

It doesn't have to be outside of retirement accounts; it can include Roth contributions and any previous conversions (such as MBR) that are eligible, either because there was no tax due at the time of conversion or the 5 years have elapsed. Even then, DH has a few years' worth of expenses in MBR conversions that would cost us only about $500 in penalties to access today.

More to the OP's point, there have been a few claims that it can be worthwhile to save on taxes while working, even if you have to pay the 10% penalty when you are earning less money. For example, if you are in the 32% bracket now, you would also be paying NIIT on capital gains. By putting money into a traditional account you save 32% on what you save this year, and capital gains tax on any distributions. Later, you may take out in the 15% bracket, so even a 10% penalty would result only bring you up to 25%, still a significant savings.

[Roots&Wings]

How much is too much in your 401k? https://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

[APBioSpartan]

I think we're in the 24% tax bracket as we make ~$250,000 annually.  Truthfully, I don't have any retirement goals aside from I don't want money to control my decisions.  I've been aiming to make as much money in [stressful] tech as possible until I completely burn out, then take some time off, and then re-enter the workforce at a reduced salary and work for a good cause.  "Use my powers for good", essentially.  This is why i'm more focused on 1) getting a "coast" retirement set aside so that no matter what, we'll have a cush retirement <and> 2) build up enough accessible excess that I can do/work for whatever I want and everything will be ok.

Worth noting, we plan on moving back to CO and likely buying a more expensive home at some point.  Hence, wanting to get things squared away before!

[boarder42]

at your tax bracket i would max my retirement accounts until i had projected the tax deferred portion to be 1MM at the age I would hit my number and retire.  From there I'd pivot my dollars into roth accounts. These roth contributions can be taken out at anytime to pay down your house if you want while having the benefit of any earning growing tax free til you withdraw at normal retirement age.  I don't see a reason to give up the tax advantages of a roth while still working to have more money in taxable accounts.

[youngwildandfree]

I think we're in the 24% tax bracket as we make ~$250,000 annually.  Truthfully, I don't have any retirement goals aside from I don't want money to control my decisions.  I've been aiming to make as much money in [stressful] tech as possible until I completely burn out, then take some time off, and then re-enter the workforce at a reduced salary and work for a good cause.  "Use my powers for good", essentially.  This is why i'm more focused on 1) getting a "coast" retirement set aside so that no matter what, we'll have a cush retirement <and> 2) build up enough accessible excess that I can do/work for whatever I want and everything will be ok.

Worth noting, we plan on moving back to CO and likely buying a more expensive home at some point.  Hence, wanting to get things squared away before!

Please don't work until you burn out! Burn out can be very hard on your mental health.

You are in a similar situation to us financially, and we are about the same age. Our approach right now is just to keep our options open, and try to focus on what makes us really happy. I know that sounds a bit cliche, but at our age/current savings I think the most beneficial strategy is to use the financial freedom to design a life that brings us maximum joy. We are finding that taking more time off (even unpaid time) to go camping, work on our house, and take long walks where we talk about the future is more beneficial right now than maximizing our savings rate further. There is a lot of peace coming from the knowledge that we can just cover our current expenses and likely still have enough for early retirement in 10-15 years. We are still at about a 50% savings rate, but that's mainly because we aren't sure what we want to do with that "extra" money, so dumping it in both tax advantaged and after tax investments allows us to decide later how we want to spend it. To put it another way (credit for this phrase going to several others in this community) we are spending half our money to buy future choices and security.

That was a lot of mumbo jumbo pre-coffee. My specific recommendation is to allocate the savings into tax advantaged/after tax accounts based on how much longer you want to work. If you aren't sure (like me), then put the max into tax advantage and give yourself a break on trying to optimize to death when life is still so uncertain. 

[terran]

Forgive me if I'm wrong, but it sounds like you might be under the misapprehension that you can't access retirement accounts during early retirement. See if this blog post clears things up for you.

[APBioSpartan]

Forgive me if I'm wrong, but it sounds like you might be under the misapprehension that you can't access retirement accounts during early retirement. See if this blog post clears things up for you.

I'm aware that you can and aware of the concept of roth conversions, but I do know they have income, timing, and tax considerations that make it situational.  There's also the option to early withdrawl at a penalty from pre-tax accounts, which again, has it's downsides.  I was more curious if the downsides and decreased flexibility of those options outweigh the tax disadvantages of post-tax brokerage account investments.  Again, my goal is flexibility and lack of financial stress so I'm willing to sacrifice some gains for convenience and flexibility. 

[yachi]

Forgive me if I'm wrong, but it sounds like you might be under the misapprehension that you can't access retirement accounts during early retirement. See if this blog post clears things up for you.

I'm aware that you can and aware of the concept of roth conversions, but I do know they have income, timing, and tax considerations that make it situational.  There's also the option to early withdrawl at a penalty from pre-tax accounts, which again, has it's downsides.  I was more curious if the downsides and decreased flexibility of those options outweigh the tax disadvantages of post-tax brokerage account investments.  Again, my goal is flexibility and lack of financial stress so I'm willing to sacrifice some gains for convenience and flexibility.

I find having to track my trades and capital gains from my post-tax brokerage account financially stressful.  It's better now that brokerages are required to track and report your cost basis, but I'd rather not have to do it. 

The disadvantage of taxable accounts depends somewhat on your behavior in it too.  Every time you sell at a profit you incur a tax in your taxable account, vs only when you withdrawal funds in an IRA.  So every time you rebalance you'll incur taxes.  Also, even if you just hold the S&P 500 and never sell, you'll have taxes due to dividends and the fund moving out of companies that drop off of the S&P 500.

I've had some really high gains in my taxable account due to holding options that increased substantially.  The thing with options is they have expiration dates, so even if you want to continue holding the company using options, you have to sell ones that are expiring to buy ones that haven't expired yet.  In an IRA, these gains aren't an issue because the sale isn't a taxable event.

I also funded a rental house purchase, and repairs from my taxable account.  I didn't have to have any penalties, but I did need to note down my capital gains and include them on my taxes.  When I refinanced the rental house years later, there were no restrictions on how much I could put into my taxable account.  I'd call these benefits.

[joemandadman189]

i think you need to figure out how much money you want and at what ages you want it, do some planning and follow the plan.
i you are maxing out your 401k and IRAs you should have 1 million by age 37, and earlier if you are saving more.

FWIW i have a plan to max tax advantaged accounts and contribute to a brokerage till the brokerage equals my mortgage+ spending till i can access retirement accounts.

[Steeze]

I highly recommend reading this article once or twice.

https://www.madfientist.com/how-to-access-retirement-funds-early/

Particularly toward the end where he compares the outcomes of saving in different buckets.

[joemandadman189]

Maybe i am missing something but if a person or couple makes over the the roth IRA income limit their only option (for tax deferred savings beyond a 401k) is a traditional IRA. In a traditional IRA any contributions are not tax deductible, per income limits, and are made after taxes are withheld from W2 income.

I this case, what's the benefit of using an IRA over a brokerage?

[ixtap]

Maybe i am missing something but if a person or couple makes over the the roth IRA income limit their only option (for tax deferred savings beyond a 401k) is a traditional IRA. In a traditional IRA any contributions are not tax deductible, per income limits, and are made after taxes are withheld from W2 income.

I this case, what's the benefit of using an IRA over a brokerage?

If the traditional IRA is empty to start with, the non deductible contribution can be converted to Roth with no tax consequences.

Some 401ks offer the further benefit of making similar after tax contributions that can be converted to Roth. In our case that is $30k+ per year that DH can add to his Roth balance, not to be taxed again until there is a major change to tax law.

[joemandadman189]

Maybe i am missing something but if a person or couple makes over the the roth IRA income limit their only option (for tax deferred savings beyond a 401k) is a traditional IRA. In a traditional IRA any contributions are not tax deductible, per income limits, and are made after taxes are withheld from W2 income.

I this case, what's the benefit of using an IRA over a brokerage?

If the traditional IRA is empty to start with, the non deductible contribution can be converted to Roth with no tax consequences.

Some 401ks offer the further benefit of making similar after tax contributions that can be converted to Roth. In our case that is $30k+ per year that DH can add to his Roth balance, not to be taxed again until there is a major change to tax law.

That's interesting and good to know but doesn't answer the question i had or the OPs question.

The argument being made by MMM and the madfientist in the links above is to use tax advantaged accounts, and i agree to an extent. in the OPs case they cant take advantage of a Roth IRA or get a deduction for Traditional IRA contributions. contributions converted to Roth cant be access fo r5 years minimum. a brokerage seems like a better option

Roth contributions can be available for withdrawal after 5 years tax free. Brokerage contributions and gains can be available after 1 year tax free under most conditions of LTCG up to $80k

[ixtap]

Maybe i am missing something but if a person or couple makes over the the roth IRA income limit their only option (for tax deferred savings beyond a 401k) is a traditional IRA. In a traditional IRA any contributions are not tax deductible, per income limits, and are made after taxes are withheld from W2 income.

I this case, what's the benefit of using an IRA over a brokerage?

If the traditional IRA is empty to start with, the non deductible contribution can be converted to Roth with no tax consequences.

Some 401ks offer the further benefit of making similar after tax contributions that can be converted to Roth. In our case that is $30k+ per year that DH can add to his Roth balance, not to be taxed again until there is a major change to tax law.

That's interesting and good to know but doesn't answer the question i had or the OPs question.

The argument being made by MMM and the madfientist in the links above is to use tax advantaged accounts, and i agree to an extent. in the OPs case they cant take advantage of a Roth IRA or get a deduction for Traditional IRA contributions. contributions converted to Roth cant be access fo r5 years minimum. a brokerage seems like a better option

Roth contributions can be available for withdrawal after 5 years tax free. Brokerage contributions and gains can be available after 1 year tax free under most conditions of LTCG up to $80k

Roth contributions are available immediately. Only taxed conversions and gains are ever tied up, either by the 5 year account clock or the 5 year conversion clock.

Only the taxable portion of a conversion is tied up for five years, as long the account clock has already expired. As such, an immediate backdoor Roth, with no taxable portion, can be as good as a contribution (assuming no outstanding conversions on which taxes were made). Meanwhile, since the OP actually asked about using these funds later, rather than next year or indeed the immediate future, OP won't being paying capital gains on dividends and distributions.

I do not personally use the backdoor Roth because I have an old pension lump summed into a tIRA and DH didn't know about it when he recharacterized to a non deductible IRA contribution many moons ago. However, I have convinced DH to use the MBR because I consider Roth space valuable enough to jump through the minimal hoops. When we are controlling our income for taxes and ACA in a few years, these Roth funds will come in handy for any large one off expenses that otherwise might really mess with our tax planning.

[Fishindude]

What's the downside of having excess $$ when you retire?

[2Birds1Stone]

What's the downside of having excess $$ when you retire?

Hammer and nail scenario. Life can get quite boring when you solve every problem by throwing money at it. I think there is a point in the financial landscape where you have enough, but there is a zest to life by keeping things in perspective and having to be creative once in a while. A lot of people here seem to strive to get to a point where the answer to every problem in their lives can be solved by one more dollar.

[shuffler]

A lot of people here seem to strive to get to a point where the answer to every problem in their lives can be solved by one more dollar.

That's why I built my forever-home next to a Dollar Store.   ;^)

[MustacheAndaHalf]

Worth noting, we plan on moving back to CO and likely buying a more expensive home at some point.  Hence, wanting to get things squared away before!

Let's say 100% equity portfolio earns 8%.  But in retirement, safety becomes more important than having more, so a bond allocation might drop that to 6%.  And once you retire, you might spend 4% of your assets a year, giving your portfolio 2% growth.  Your portfolio growth will change dramatically when you retire, and since we're on a FIRE forum, that is probably much sooner than age 65.

Do you want a mortgage in retirement?  If not, expect to pay the full price of that house, which will go up in price between now and when you buy it.  I'd suggest re-running your projected retirement assets after counting for buying a house and for changes in allocation and spending in retirement.

[LightStache]

Yes you can overfund your retirement accounts. If you contribute a lot of tax deferred money in your 20s, stop contributing from 30-65, then started withdrawals at 65, you will probably pay higher overall taxes compared to contributing the same amount spread over all earning years.

My plan is optimized to FIRE in my early 40s with a Roth ladder. That translates to high contributions to my tax deferred accounts in 20s and 30s with withdrawals starting in my 40s. I use the top of the 24% bracket as a taxable income goal for my earning years because I project my bracket in retirement to be 25%.

If I end up working longer than my early 40s, those extra earnings will just be gravy, but that income will likely cause me to pay overall higher lifetime tax. OTOH I'm finding that as I become wealthier, there are more opportunities to time or altogether avoid taxable income.

In the mid-distance race to get to FI, the ability to defer tax on 37.3% of my income (28% fed and 9.3% state) has a major impact on my savings rate and therefore the timeline to reach the FI finish line. IMO that benefit massively outweighs the inconvenience of having that money locked away.