Author Topic: too much in 401k  (Read 3944 times)

vivophoenix

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too much in 401k
« on: October 13, 2016, 09:25:35 AM »
this may be a stupid question but:

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


Am I to understand from this article that, at some point, i will have put too much money in my 401k ( assuming i start drawing this money at 60)?

at that point, if it occurs:

 does that mean you stop investing in the 401k,  and focus more on taxable accounts?


or do you always max the 401k and the IRA, and taxable accounts,  then retire when you hit the appropriate total?

lhamo

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Re: too much in 401k
« Reply #1 on: October 13, 2016, 09:40:19 AM »
You really can't ever have too much money in your 401k, because as noted in the latter part of the article you can convert it to a Roth or take SEPPs as needed.  This is especially true if you are planning to retire at age 59.5 or older (or leave you last employer at age 55+) -- in that case the 401k money would be immediately accessible to you and you don't have to worry about penalties (though you would have to pay taxes on the withdrawals from traditional plans)

But to be most tax efficient, you want to have some money outside the 401k that is accessible to you prior to ages 59.5/55 if you want to leave paid employment at a younger age.  If you start early, contributing the max to your Roths every year may be enough to bridge the gap.  If you have access to a Roth 401k or 403b at work this is doubly true -- I have over $100k in contributions to the Roth IRA that I rolled over from my Roth 403b at work, which I can access at any time, so I don't even need to worry about setting up a full Roth conversion ladder (though I do plan to start converting my traditional accounts to Roths as soon as our income situation makes it tax efficient to do so).

If you don't have enough time to build up your Roth contributions before you leave paid employment (and remember, your target number for the Roth contribution amount only needs to be enough to cover you for five years if you are doing the Roth conversion ladder, or however many years you have to age 59.5 if that is less than five years), then you will want to have some of your stash in non-retirement taxable accounts.  Unless you plan to fund some of your FI expenses by downsizing a home and freeing up cash that way.

vivophoenix

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Re: too much in 401k
« Reply #2 on: October 13, 2016, 09:53:27 AM »
i guess i am a little confused .

let's say like the example in the article i am 30 and have 100k in my 401k.

But i would like to retire before 60. let us say, i want to retire at 40.

in order to have money for years 40-60,penalty free, it would have to come from my taxable investments/IRA roth/real estate, correct?


so does that mean i should start directing more of my income towards post tax investments.

because currently maxing out a 401k and an IRA roth every year, that does not leave a ton of income to invest after taxes.

i am further confuzzled because i like taking advantage of the pre tax contribution to my 401k as my marginal tax rate is rather high.
« Last Edit: October 13, 2016, 09:58:40 AM by vivophoenix »


vivophoenix

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Re: too much in 401k
« Reply #4 on: October 13, 2016, 10:08:31 AM »

BarkyardBQ

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Re: too much in 401k
« Reply #5 on: October 13, 2016, 10:19:15 AM »
Read Here.

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

but isnt that after you retire?

i am talking about how to save before i retire

All your saving is done before you retire. The majority of your saving should be done in tax advantaged accounts. Before you pull the trigger, you will need 5 years worth of accessible funds for expenses in cash, taxable brokerage accounts, or a 457b. Or a part time job, covering your expenses, but reducing your tax burden while you do the conversions.

You can do this any logical way that works best for you.

You can withdrawal your Roth Contributions and live on those for the 5 years.
You can invest in a Traditional IRA and 401k for the majority of your accumulation phase (allowing tax free compounding and time to take affect), and then switch to taxable savings and cash the last years.
Work part time, lowering your income taxes so your conversion isn't taxed in higher brackets.
Live on rental income.
Take a 5 year vacation to countries where you would spend only 15k instead of 25k a year (or whatever your numbers are).


http://www.madfientist.com/how-to-access-retirement-funds-early/
« Last Edit: October 13, 2016, 10:35:59 AM by BackyarBQ »

vivophoenix

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Re: too much in 401k
« Reply #6 on: October 13, 2016, 10:30:51 AM »
Read Here.

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

but isnt that after you retire?

i am talking about how to save before i retire

No. See the Pipeline Rules

http://www.madfientist.com/how-to-access-retirement-funds-early/
maybe i am not explaining well

so lets say i have 100k in my 401k, and nothing in my IRA and i am 30

if i keep maxing 401k and ira till I am 40.
when i am 40 i will have ~$480k in my 401k and ~$80k in my IRA.

i will have enough in my IRA to have ~30k for two years. but if i start the pipeline right at 40, it will not be ready for five years? so i will need money for  3 years


so do i save that three money year now, in non taxable accounts, or wait?


also if when i retire i decide 4% draw down is not enough, shouldn't i be saving more money, i guess the question is, when should i save that extra money?

or should i always just put everything in my 401k and save everything i can and ignore this.

maybe i am over thinking it



Cathy

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Re: too much in 401k
« Reply #7 on: October 13, 2016, 10:31:41 AM »
There is no "one sized fits all" solution for things like this. For some people, it may be difficult or impossible to defer "too much" to a plan commonly referred to as a 401(k) plan. However, for other people, there may be scenarios where it is optimal to defer less than the maximum permissible. It all depends on your specific circumstances. You need to consider an individualised model in order to evaluate your options.

It's also worth bearing in mind that tax law can change at any time, sometimes even retroactively. See generally Erika K. Lunder et al, Constitutionality of Retroactive Tax Legislation, Congressional Research Service, Report No R42791 (Oct 25, 2012). Only you can decide how you will attempt to mitigate against such risks.

vivophoenix

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Re: too much in 401k
« Reply #8 on: October 13, 2016, 10:32:23 AM »
Read Here.

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

but isnt that after you retire?

i am talking about how to save before i retire

All your saving is done before you retire. The majority of your saving should be done in tax advantaged accounts. Before you pull the trigger, you will need 5 years worth of accessible funds for expenses in cash, taxable brokerage accounts, or a 457b. Or a part time job, covering your expenses, but reducing your tax burden while you do the conversions.


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


okay thanks,

that answers it for me.

i gues si was confused because mmm says he hasn't touched his 401k ever and considers it old man money, i panicked and thought i was doing it wrong

BarkyardBQ

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Re: too much in 401k
« Reply #9 on: October 13, 2016, 10:39:57 AM »
Sorry, I was updating my response with more detail while you replied.

vivophoenix

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Re: too much in 401k
« Reply #10 on: October 13, 2016, 10:43:49 AM »
Sorry, I was updating my response with more detail while you replied.


thanks so much your response helped me a lot!!

it confirmed in more detail what i thought i should be thinking about.


telling  me how to do a 5 year pipeline, didnt cover what i was asking.

des999

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Re: too much in 401k
« Reply #11 on: October 13, 2016, 10:55:06 AM »
Read Here.

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

but isnt that after you retire?

i am talking about how to save before i retire

All your saving is done before you retire. The majority of your saving should be done in tax advantaged accounts. Before you pull the trigger, you will need 5 years worth of accessible funds for expenses in cash, taxable brokerage accounts, or a 457b. Or a part time job, covering your expenses, but reducing your tax burden while you do the conversions.

You can do this any logical way that works best for you.

You can withdrawal your Roth Contributions and live on those for the 5 years.
You can invest in a Traditional IRA and 401k for the majority of your accumulation phase (allowing tax free compounding and time to take affect), and then switch to taxable savings and cash the last years.
Work part time, lowering your income taxes so your conversion isn't taxed in higher brackets.
Live on rental income.
Take a 5 year vacation to countries where you would spend only 15k instead of 25k a year (or whatever your numbers are).


http://www.madfientist.com/how-to-access-retirement-funds-early/
[/quote

another possible option I am looking at, since my Roth/after tax account may not be sufficient for 5 years to do a conversion, just start withdrawing the 35k (which has 0 tax for our family of 3), and pay the 10% penalty.  Paying only 10% seems like a decent option for me.

NoStacheOhio

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Re: too much in 401k
« Reply #12 on: October 13, 2016, 11:54:58 AM »

okay thanks,

that answers it for me.

i gues si was confused because mmm says he hasn't touched his 401k ever and considers it old man money, i panicked and thought i was doing it wrong

He also has a huge amount of advertising revenue from the website. Way more than he spends in a year anyway.

ooeei

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Re: too much in 401k
« Reply #13 on: October 13, 2016, 12:35:53 PM »
Read Here.

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

but isnt that after you retire?

i am talking about how to save before i retire

No. See the Pipeline Rules

http://www.madfientist.com/how-to-access-retirement-funds-early/
maybe i am not explaining well

so lets say i have 100k in my 401k, and nothing in my IRA and i am 30

if i keep maxing 401k and ira till I am 40.
when i am 40 i will have ~$480k in my 401k and ~$80k in my IRA.

i will have enough in my IRA to have ~30k for two years. but if i start the pipeline right at 40, it will not be ready for five years? so i will need money for  3 years


so do i save that three money year now, in non taxable accounts, or wait?


also if when i retire i decide 4% draw down is not enough, shouldn't i be saving more money, i guess the question is, when should i save that extra money?

or should i always just put everything in my 401k and save everything i can and ignore this.

maybe i am over thinking it

One thing I noticed here is you're talking about spending $30k/year, while having $560k saved (most of which will still be taxed when you take it out).  This is a 5.4% withdrawal rate, but actually probably closer to 6% when you take taxes into account.  If you have flexibility in your budget or an easy path to extra income in down times, it's probably not an issue, but is generally less conservative than the average person on this site.

nereo

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Re: too much in 401k
« Reply #14 on: October 13, 2016, 12:45:43 PM »

i gues si was confused because mmm says he hasn't touched his 401k ever and considers it old man money, i panicked and thought i was doing it wrong

Posting to add:  MMM doesn't need to touch his 401(k), though he's certainly aware that he could by setting up a 72(t) or pipeline. By all accounts he overshot how much he needs in retirement, in part because he keeps earning money through his 'fun' projects and blog.

You aren't doing it wrong.  There's no one-size-fits-all approach.  We plan on converting our 401(k) to a tIRA and then setting up a pipeline. We already have 3+ years of living expenses in taxable accounts though, and that amount grows slightly each year.

vivophoenix

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Re: too much in 401k
« Reply #15 on: October 13, 2016, 01:14:29 PM »
Read Here.

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

but isnt that after you retire?

i am talking about how to save before i retire

No. See the Pipeline Rules

http://www.madfientist.com/how-to-access-retirement-funds-early/
maybe i am not explaining well

so lets say i have 100k in my 401k, and nothing in my IRA and i am 30

if i keep maxing 401k and ira till I am 40.
when i am 40 i will have ~$480k in my 401k and ~$80k in my IRA.

i will have enough in my IRA to have ~30k for two years. but if i start the pipeline right at 40, it will not be ready for five years? so i will need money for  3 years


so do i save that three money year now, in non taxable accounts, or wait?


also if when i retire i decide 4% draw down is not enough, shouldn't i be saving more money, i guess the question is, when should i save that extra money?

or should i always just put everything in my 401k and save everything i can and ignore this.

maybe i am over thinking it

One thing I noticed here is you're talking about spending $30k/year, while having $560k saved (most of which will still be taxed when you take it out).  This is a 5.4% withdrawal rate, but actually probably closer to 6% when you take taxes into account.  If you have flexibility in your budget or an easy path to extra income in down times, it's probably not an issue, but is generally less conservative than the average person on this site.

i was using random numbers for my draw down rate. i will probably need way less money.
 
and i dont even know if i want to retire at 40.

i like my career. i am using early retirement as a back door option, more so than a goal. i would rather max everything out and feel like i am winning by paying less taxes. i figure save like crazy, till im 40, and then i can spend freely. and then at 60: hookers and blow!!