Author Topic: Should I stop 401K contributions?  (Read 4033 times)

trashmanz

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Should I stop 401K contributions?
« on: September 11, 2015, 12:38:20 AM »
Stats:

-37 Years old, married.  3 children all under 6 years old (each child has a ~8,000 in a 529).
-No debt, except mortgage, ~$400,000 (Bay Area, CA) 27 years left to pay off, just bought house 3 years ago
-Combined ~$400,000 in retirement accounts (mostly 401K/traditional IRA, some Roth)  All in the stock market-mostly index funds
-Living within our means currently.  Still doing the calculations as to how much we spend/burn rate, but mortgage alone is $25K a year, probably we are at about ~38,000 spending a year outside of the mortgage. 
- Also have a decent emergency fund cash stash set aside to cover a year of expenses. 

So, it seems at a moderate 5% growth rate in the stocks, we should be at about 1,700,000 at about the time we can start withdrawing without penalty, and also about that time when the mortgage has been paid off.  So we should be more than OK with the 4% draw down when we hit 65 years old (4% is  68,000 a year) at that time.  Therefore, I'm starting to think, what is the point of us continuing to add to the 401K that we can't touch for 30 years?  Also, I don't get any % match at work BTW, but I have to check if my wife does (its a 403B).  I can't FIRE with the money that is locked up in the retirement, so perhaps property and rental income is where i should be focused now?  Thoughts? 
« Last Edit: September 11, 2015, 12:42:03 AM by trashmanz »

michaelrecycles

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Re: Should I stop 401K contributions?
« Reply #1 on: September 11, 2015, 01:02:15 AM »
Looks like this is your first post, welcome to the forum.

I couldn't recommend ceasing 401k contributions. You can access them before "retirement age." There are a few methods to do this that you can research, including converting your 401k to an traditional IRA, and then to a Roth over time (aka Roth conversion ladder). So continuing contributions would A) defer income tax and B) facilitate retiring sooner than 65 via A combined with continued savings.

Some related reading:
Roth conversion ladder article
Roth conversion ladder wiki style article
benefit of deferment

All three of the above websites contain a host of other great info to delve into as well.
« Last Edit: September 11, 2015, 01:04:57 AM by michaelrecycles »

trashmanz

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Re: Should I stop 401K contributions?
« Reply #2 on: September 11, 2015, 01:15:46 AM »
Looks like this is your first post, welcome to the forum.

I couldn't recommend ceasing 401k contributions. You can access them before "retirement age." There are a few methods to do this that you can research, including converting your 401k to an traditional IRA, and then to a Roth over time (aka Roth conversion ladder). So continuing contributions would A) defer income tax and B) facilitate retiring sooner than 65 via A combined with continued savings.

Some related reading:
Roth conversion ladder article
Roth conversion ladder wiki style article
benefit of deferment

All three of the above websites contain a host of other great info to delve into as well.

Thank you for the welcome and the reading material.  I wasn't aware of ways to get the money early without getting hit with early withdrawal penalties so I will definitely look into that and that would change my calculations.  I suppose with that in mind I may continue to contribute to the max allowed and use the rest for alternative investments (e.g., real estate/lending club/business startup money) all to get to FIRE ASAP.
« Last Edit: September 11, 2015, 01:32:39 AM by trashmanz »

zolotiyeruki

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Re: Should I stop 401K contributions?
« Reply #3 on: September 11, 2015, 11:54:54 AM »
You sound like me plus a couple years!

Just a couple points to add to michaelrecycles' post:
1) You're in a very HCOL area in a state with really high taxes.  That means you should be highly motivated to reduce your taxable income.  So max out your 401k contributions if you can, then contribute to a traditional IRA if you're not already phased out.  With CA's 10% marginal rate plus the 25% federal marginal rate I suspect you're in, that's a huge savings.
2) You can withdraw funds early from a traditional IRA without penalty if you take Substantially Equal Payments.  You basically commit to withdraw 2-2.5% of your IRA balance for 5 years or until you hit age 59.5, whichever comes later.  This factors significantly into my ER plans.

trashmanz

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Re: Should I stop 401K contributions?
« Reply #4 on: September 11, 2015, 01:31:46 PM »
You sound like me plus a couple years!

Just a couple points to add to michaelrecycles' post:
1) You're in a very HCOL area in a state with really high taxes.  That means you should be highly motivated to reduce your taxable income.  So max out your 401k contributions if you can, then contribute to a traditional IRA if you're not already phased out.  With CA's 10% marginal rate plus the 25% federal marginal rate I suspect you're in, that's a huge savings.
2) You can withdraw funds early from a traditional IRA without penalty if you take Substantially Equal Payments.  You basically commit to withdraw 2-2.5% of your IRA balance for 5 years or until you hit age 59.5, whichever comes later.  This factors significantly into my ER plans.

Makes sense, all good points.  This is what I get for trying to rework my retirement stratetgy at 2AM on a Thursday night.  I think what I was thinking was that it would be best to switch over to saving for an investment property exclusively, but it seems that the best course is to save for the downpayment while continuing to match even if it takes longer, it seems more sensible in the long run.

It seems that continuing with the 401K/IRA is still going to be a critical part of FIRE
« Last Edit: September 11, 2015, 01:36:17 PM by trashmanz »

MDM

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trashmanz

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Re: Should I stop 401K contributions?
« Reply #6 on: September 11, 2015, 03:09:50 PM »

MoonShadow

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Re: Should I stop 401K contributions?
« Reply #7 on: September 11, 2015, 03:43:59 PM »
tl/dr  What is the alternative to continuing with your 401k?


I'm going to be the contrarian in this thread, and say that the answer depends more upon what your alternative investment may be.  What would you actually do with the income you have been putting into your 401k, if you stopped contributing?  Another factor is the quality of your 401k choices.  Without a match, a 401k doesn't really have any advantage over a traditional IRA, and there are some fine reasons to consider a Roth IRA and HSA.  Even a taxable account might have notable advantages over contributing to a 401k, depending upon the details.  For example, if you were to limit your 401k contributions, and direct those funds into a combination of Roth IRA & taxable investment accounts; you would have a growing stache that you could draw from if you were to encounter a promising investment locally; such as a high value rental property, or as an angel investor in a small, local company start-up.  If such a chance never arrives; you could FIRE early and lump sum payoff your mortgage on a market high, or continue to pay the mortgage during a market low.  But you would have choices that keeping everything in a 401k would not allow.

trashmanz

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Re: Should I stop 401K contributions?
« Reply #8 on: September 12, 2015, 10:10:09 PM »
tl/dr  What is the alternative to continuing with your 401k?


I'm going to be the contrarian in this thread, and say that the answer depends more upon what your alternative investment may be.  What would you actually do with the income you have been putting into your 401k, if you stopped contributing?  Another factor is the quality of your 401k choices.  Without a match, a 401k doesn't really have any advantage over a traditional IRA, and there are some fine reasons to consider a Roth IRA and HSA.  Even a taxable account might have notable advantages over contributing to a 401k, depending upon the details.  For example, if you were to limit your 401k contributions, and direct those funds into a combination of Roth IRA & taxable investment accounts; you would have a growing stache that you could draw from if you were to encounter a promising investment locally; such as a high value rental property, or as an angel investor in a small, local company start-up.  If such a chance never arrives; you could FIRE early and lump sum payoff your mortgage on a market high, or continue to pay the mortgage during a market low.  But you would have choices that keeping everything in a 401k would not allow.

Yes, an investment property is the main reason I would dial back.  I don't have enough for a downpayment yet and could accelerate towards the necessary amount if I were not contributing so much to the 401K. 

Dicey

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Re: Should I stop 401K contributions?
« Reply #9 on: September 12, 2015, 10:41:05 PM »
I read this thread yesterday, but decided not to post my contrarian thoughts. Now that Moonshadow has said what I was thinking, only much better than I could have, and you have confirmed your intent to buy property, here's my two cents coming at you.
When IRA's started, I deliberately ignored them, because I was focused on amassing down payment money. Now that I'm finally FIRE, I am convinced it was the right choice. Owning real estate has been very good for my portfolio. When I second guess my decision not to contribute to a retirement vehicle in those early years, I only have to look at the value of my RE now. And then I remind myself that I never have to fear a Monday ever again. There are many paths to FIRE. What you are considering has as good or better chance of succeeding than just staying the course.

Goldielocks

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Re: Should I stop 401K contributions?
« Reply #10 on: September 13, 2015, 12:37:11 AM »
tl/dr  What is the alternative to continuing with your 401k?


I'm going to be the contrarian in this thread, and say that the answer depends more upon what your alternative investment may be.  What would you actually do with the income you have been putting into your 401k, if you stopped contributing?  Another factor is the quality of your 401k choices.  Without a match, a 401k doesn't really have any advantage over a traditional IRA, and there are some fine reasons to consider a Roth IRA and HSA.  Even a taxable account might have notable advantages over contributing to a 401k, depending upon the details.  For example, if you were to limit your 401k contributions, and direct those funds into a combination of Roth IRA & taxable investment accounts; you would have a growing stache that you could draw from if you were to encounter a promising investment locally; such as a high value rental property, or as an angel investor in a small, local company start-up.  If such a chance never arrives; you could FIRE early and lump sum payoff your mortgage on a market high, or continue to pay the mortgage during a market low.  But you would have choices that keeping everything in a 401k would not allow.

+1

I am all for the 401k contributions (and obviously if you had a match, that is hard to beat);  but once you have your "retirement nest egg" set (plus a safety factor), you really don't want to be paying more in taxes in retirement than you do now...

So, at this point, you need to evaluate the best way to make money, based on the Present value -- deferring taxes using a 401k is nice, as is having 100% of the gross automatically working for you now...  and you get gains on the before tax dollars to grow a bit faster....

BUT -- maybe you want to start a side business?  Invest in real estate?  Have a great partnership or small incorporated business investment opportunity that would pay out?  Hey, maybe investing in your relationships or education to secure a long term marriage / get more employment income is the way to go.

Just don't forget to consider the value of paying in future dollars, the same tax that you pay now...  deferring tax for 20 year at a 3% interest rate is worth quite a bit.

trashmanz

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Re: Should I stop 401K contributions?
« Reply #11 on: September 13, 2015, 10:02:19 PM »

Just don't forget to consider the value of paying in future dollars, the same tax that you pay now...  deferring tax for 20 year at a 3% interest rate is worth quite a bit.

Not sure I follow, can you expand?