Author Topic: Sorry, I'm still confused about how much to put in my 401k  (Read 9236 times)

sheepstache

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Sorry, I'm still confused about how much to put in my 401k
« on: December 03, 2012, 02:31:29 PM »
Anybody else here "low" income and torn about how much to put into a 401K?  It seems like for anyone in the 25% or above tax bracket the choice is pretty clear, or at least you have the option to max it out and still have plenty left over for other accounts, but it's hard to tell when the savings is 15% and you're risking illiquidity.  I won't max it out since that would basically be my savings for the year, but I'm not sure how to figure what percentage I should put in there. 

Anybody else thinking along the same lines?  I mean I guess the thing is I keep a good chunk in cash for immediate emergencies, principal in the Roth is accessible if need be, and if I needed a downpayment on a house it would mean on the one hand I was moving out of the city away from my job so I couldn't take a 401K loan anymore but on the other hand it would mean I was selling my apartment which should cover it.  I might need to ease off for a couple years when I have kids, but I would rather try to live off the spouse's income than use dividends, I guess.  So let's say I save 1500 a month: 460 to Roth, then split 1040 between 401K and taxable, does that sound reasonable?  I just can't tell whether I'm locking myself in too much or not taking enough advantage of the 401K and I feel really stupid because I'm still torn even after reading about it a bunch.

jpo

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #1 on: December 03, 2012, 02:41:01 PM »
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/ is something to consider. Personally I am planning on using Strategy 1 + FIREcalc to figure out how much to contribute to 401k. The rest goes in taxable/house down payment/etc.

kisserofsinners

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #2 on: December 03, 2012, 02:49:25 PM »
When i was getting started i kept an emergency fund cash and just put as much as i could afford in the 401k (403b). It just gets the best returns overtime with the best tax benefits.

If you are out of debt and have a specific financial goal, buying a house or a car or other big ticket item, put aside some in addition to your retirement savings for that. Otherwise, put as much into your 401k as possible until you're maxed out.

That is how i'd go about it, but it's really best to find out what is good for you. For me i literally had to squirrel money away where i couldn't get to it. Otherwise, i'd keep dipping into it. It's been a few years now and i have far better self control; in the beginning 401k all the way, no take backs. :)

sheepstache

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #3 on: December 03, 2012, 03:09:14 PM »
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/ is something to consider. Personally I am planning on using Strategy 1 + FIREcalc to figure out how much to contribute to 401k. The rest goes in taxable/house down payment/etc.

See, I've read that and I like strategy 1, the problem is I'd have to stash everything for the next few years at least, and that's when there are the most variables in my life and I can afford the illiquidity the least.  There's no "rest of" to go into taxable or other events because according to the strategy and the calculators I'd max it out for 3-4 years in order to have about 11,500 a year at age 60.  Then I'd max out in taxable accounts for another few years to cover the time in between, but then that stuff wouldn't have any compounding time.  I mean, it is what it is, but for some reason I still don't feel like I've got the thinking behind it nailed down.

jpo

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #4 on: December 03, 2012, 03:23:26 PM »
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/ is something to consider. Personally I am planning on using Strategy 1 + FIREcalc to figure out how much to contribute to 401k. The rest goes in taxable/house down payment/etc.

See, I've read that and I like strategy 1, the problem is I'd have to stash everything for the next few years at least, and that's when there are the most variables in my life and I can afford the illiquidity the least.  There's no "rest of" to go into taxable or other events because according to the strategy and the calculators I'd max it out for 3-4 years in order to have about 11,500 a year at age 60.  Then I'd max out in taxable accounts for another few years to cover the time in between, but then that stuff wouldn't have any compounding time.  I mean, it is what it is, but for some reason I still don't feel like I've got the thinking behind it nailed down.
Not sure why you can't split between 401k and taxable until you have enough in both to retire.

This is the way I've been thinking of it, there may be someone on here with a better way. You have three stages of life: Working, Early Retirement, and After 60. You need to put enough in the 401k during the working period such that after investment returns it has enough money to sustain your After 61 living expenses. You also need to put enough in accessible accounts that you can safely draw down principal until 60.

So, suppose you want an income of $25k. To calculate for After 60, you'll need to have $625k sitting in your 401k ($25k/4% SWR). However, that money will have time during Early Retirement to compound, so you really need to save $625k/(1 + investment return^(60 - retirement age)). Plugging in some numbers out of a hat, that would be:
$625k/(1.08^(60-40)) = ~$135k

Now, suppose you are 25 years old, you have 15 years to get to $135k in your 401k. Even if you ignore investment returns along the way, $135k/15 years = only $9000/year in your 401k. The rest can go in your regular account slated for Early Retirement.

That's a bunch of assumptions to make, and it's definitely worth running your Early Retirement scenario through FIREcalc to determine success rate for your drawdown. If you use the "Not Retired" tab it gives you a nice model of what will happen between now and age 60 at different savings rates and retirement ages.
« Last Edit: December 03, 2012, 03:32:04 PM by jpo »

grantmeaname

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #5 on: December 03, 2012, 03:41:24 PM »
The big assumption there being that you won't use the 401k money until you're 60. That's a choice, but it's not a good one.

Sheepstache, do you have access to a Roth 401k? Can you do in-service distributions?

chucklesmcgee

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #6 on: December 03, 2012, 04:52:06 PM »
Sheepstache, do you have access to a Roth 401k?

+1. Regular IRAs/401ks don't make too much sense when you're already in a low tax bracket. Plus you're insuring yourself against future tax hikes.

sheepstache

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #7 on: December 03, 2012, 08:52:44 PM »
Y'all are awesome, thanks for all the replies.


Not sure why you can't split between 401k and taxable until you have enough in both to retire.
Oh, I absolutely can, that's just not the strategy 1 outlined in the MMM  post, that's what I was responding to.  The trick is deciding _how_ to split it.  50/50 sounds good to me, I just have the sort of brain that wants to know _why_ that's optimal or not.

Now, suppose you are 25 years old,

Ah, if only :)  I'm 31, though fortunately I need a lot less than you mention.  Like the numbers I mentioned, maxing it out for 3-4 years would leave me set for 60.  I find it less easy to account for the 25 years until then which was why I was wondering if doing it in that order made the most sense but it doesn't change much when I run numbers, they just both end up short.  I do understand the concept of breaking up "retirement" like that, though.  Psychologically I like the idea of having a stashed stash that picks up at 60, particularly as I might plan my ER to require some part-time work just to get myself out of the house.  And at first glance it makes more sense than a rollover + 72(t) situation since it's giving the tax-advantaged money the biggest amount of time to compound, plus early distributions might actually screw me with taxes if my spouse keeps working and his income goes up a lot (which contingency is quite possible).

Sheepstache, do you have access to a Roth 401k?

+1. Regular IRAs/401ks don't make too much sense when you're already in a low tax bracket. Plus you're insuring yourself against future tax hikes.

I would think that the advantage of tax-deferred growth made up for a (potential) difference between tax treatment of dividends/gains vs. income, but I'm not sure how to calculate to what extent.  Then again, I understand why my Roth IRA is good and figured I would be hedging my bets by continuing to max that out.

But to answer the question, no, I don't believe I do.  I could check with Principal, which administers the plan, but my employer  only ever refers to a regular 401k.  Is it something that's available to the self-employed?  I don't know if I'd qualify but I do have some self-employment income.  My employer's payroll department is one woman in an office under the stairs so I wouldn't bet money on in-service distributions but it's neat to hear about.

So what it comes down to is people are saying a Roth-type post-tax contribution account would be the best, but once I've maxed out those options, when to decide between pre-tax and taxable accounts is the trick.

For me i literally had to squirrel money away where i couldn't get to it. Otherwise, i'd keep dipping into it. It's been a few years now and i have far better self control; in the beginning 401k all the way, no take backs. :)

This is good advice but I don't have a problem with self control.  My spouse does so I'm encouraging him to save in his 401k, but then he's also the one who still has to save up his half of a house down payment :)  Ain't that a bitch?

jpo

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #8 on: December 04, 2012, 07:11:09 AM »
The big assumption there being that you won't use the 401k money until you're 60. That's a choice, but it's not a good one.
Can you elaborate on why that's a poor assumption/choice?

Assuming you buy into FIREcalc's premise, one could achieve 100% historic probability of not running out of the non-401k money before age 60, if having saved enough in accessible accounts.

trammatic

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #9 on: December 04, 2012, 09:16:18 AM »
The big assumption there being that you won't use the 401k money until you're 60. That's a choice, but it's not a good one.
Can you elaborate on why that's a poor assumption/choice?
There are methods to withdraw money from a 401(k) before 60 without penalty.  They do have restrictions, but perhaps the most famous is under tax code 72(t), which applies if you take substantially equal actuarially-justified annual payments...

jpo

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #10 on: December 04, 2012, 09:26:42 AM »
The big assumption there being that you won't use the 401k money until you're 60. That's a choice, but it's not a good one.
Can you elaborate on why that's a poor assumption/choice?
There are methods to withdraw money from a 401(k) before 60 without penalty.  They do have restrictions, but perhaps the most famous is under tax code 72(t), which applies if you take substantially equal actuarially-justified annual payments...
I don't see how that makes waiting to touch it a poor choice. Also, the amount that you would be able to withdraw is, at the current rate, very small in relation to the account balance.
« Last Edit: December 04, 2012, 09:28:42 AM by jpo »

trammatic

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #11 on: December 04, 2012, 09:49:30 AM »
Using the BankRate calculator, http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx, a 40 year old could withdraw up to 32k/year on a 800k IRA under 72(t) using today's numbers...which happens to be 4%.  Even if you could only withdraw half of that, the tax deferral is still significant.

bo_knows

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #12 on: December 04, 2012, 09:53:55 AM »
Using the BankRate calculator, http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx, a 40 year old could withdraw up to 32k/year on a 800k IRA under 72(t) using today's numbers...which happens to be 4%.  Even if you could only withdraw half of that, the tax deferral is still significant.

The 120% mid-term rate is only 1.14%. Where are you getting 4%? At 1.14%, a 40yr old could only get ~$23k from that same $800k nest egg. You need $1.1M to get $32k/yr.

grantmeaname

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #13 on: December 04, 2012, 10:29:35 AM »
I don't see how that makes waiting to touch it a poor choice. Also, the amount that you would be able to withdraw is, at the current rate, very small in relation to the account balance.
You're unnecessarily foregoing favorable tax treatment for your 'stache if you contribute a dime to your taxable accounts before your 401k and IRA are maximized for a year. That's not the end of the world, but it is throwing away money, which this community tends to go against.

 I'm not suggesting a 72t withdrawal, but a Roth rollover pipeline. I've already explained the difference half a dozen times, so I'll link you to one explanation rather than repeating it in full here. I'm guessing you already knew that, because we've had this discussion before.

jpo

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #14 on: December 04, 2012, 12:06:29 PM »
I don't see how that makes waiting to touch it a poor choice. Also, the amount that you would be able to withdraw is, at the current rate, very small in relation to the account balance.
You're unnecessarily foregoing favorable tax treatment for your 'stache if you contribute a dime to your taxable accounts before your 401k and IRA are maximized for a year. That's not the end of the world, but it is throwing away money, which this community tends to go against.

I'm not suggesting a 72t withdrawal, but a Roth rollover pipeline. I've already explained the difference half a dozen times, so I'll link you to one explanation rather than repeating it in full here. I'm guessing you already knew that, because we've had this discussion before.
I'm familiar. Biggest assumption I see is that the pipeline won't be closed by legislators during the next ~35 years, but there's plenty of other equally large assumptions in the thread.

grantmeaname

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #15 on: December 04, 2012, 12:46:31 PM »
You have some ideological problem so big you'd rather pretend the technique didn't exist?

jpo

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #16 on: December 04, 2012, 01:01:18 PM »
You have some ideological problem so big you'd rather pretend the technique didn't exist?
Did someone take a leak in your Cheerios this morning? I don't see anyone anywhere who's pretending it doesn't exist.

grantmeaname

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #17 on: December 04, 2012, 05:23:19 PM »
Did someone take a leak in your Cheerios this morning?
Every morning. It's awful. Sorry to stomp around the forum with a bad case of the grumps, that wasn't my goal.

Quote
I don't see anyone anywhere who's pretending it doesn't exist.
The bit where you say that money can only be gotten out of a 401k very slowly. That's true, but only if you limit yourself to 72t withdrawals and ignore the pipeline method. I get that you're wary of the technique's continued existence for political reasons, but that doesn't mean it's not an option.

sheepstache

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #18 on: December 04, 2012, 09:11:10 PM »
So . . . folks vote for maxing out with eventual rollover starting at retirement even though I'm in a low tax bracket? 
One other thing I just thought of is in New York it's state tax deferred too.  Step 2. Move to PA when the distributions come out.  Step 3. Profit! 
I can't figure out if New York City tax is deferred too; that would be big.

Update in case anyone is interested: According to my pay stub, the NYC local tax is deferred too.
« Last Edit: February 14, 2013, 09:59:43 AM by sheepstache »

NWstubble

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #19 on: December 05, 2012, 12:08:48 AM »

I'm familiar. Biggest assumption I see is that the pipeline won't be closed by legislators during the next ~35 years, but there's plenty of other equally large assumptions in the thread.

Same feelings here. Given my current low tax bracket and our country's political circus, combined with the wee little national debt issue, I am hedging my bet that loop holes like the pipeline method will be going away before I can take advantage of them.

Also, +1 for the Cheerios comment. No offense Grant, but it made me laugh.

grantmeaname

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #20 on: December 05, 2012, 03:36:59 PM »
So . . . folks vote for maxing out with eventual rollover starting at retirement even though I'm in a low tax bracket?
This folk does. Seems there's some legislative doom and gloom for everybody else though.

arebelspy

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #21 on: December 05, 2012, 05:18:40 PM »
Ultimately, peace of mind for you is most important.  If that means striking a balance between taxable and non-taxable that you are comfortable with.. Do it.
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sheepstache

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Re: Sorry, I'm still confused about how much to put in my 401k
« Reply #22 on: December 05, 2012, 09:08:29 PM »
Hee hee, thanks guys.  It occurs to me that the plans are identical for the first 3 years anyway, so I can always reconsider then.