Author Topic: Is Maxing Out 401K Necessary?  (Read 5089 times)

RookieStache

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Is Maxing Out 401K Necessary?
« on: February 22, 2018, 08:07:59 AM »
I've read a couple of financial books and have really started to get into this forum as well as a couple of others. That being said, one take I constantly find is that you should max out your 401K and IRA before anything else (529's, paying extra on mortgage, HSA, stocks, etc.).

I'm 29 and my wife is 27. We have a 18 month old and will be trying for #2 next month (want 3 children when it's all said and done).
I live in a LCOLA and I will most likely be here the rest of my life. Our "forever house" will be paid off when I am at the age of 48, if we don't pay it off any quicker than we are already planning to.
We have no debt except for the house.
Combined, we don't make a great deal, $100,000 before taxes. My wife's salary will most likely remain stagnant while I am looking at a 4% increase a year. I max out my Roth IRA while contributing 12% to 401K. The wife contributes 12% to her 401K and we will be starting up a Roth IRA for her within the next year. I contribute $62.50 a week to HSA (generous match from employer), $40 a month to Mutual Funds and $25 a week to 529.

With my current financial plan, we will have no house payment, and should have no debt going into retirement. We will have a hefty HSA fund to help take care of any / all medical expenses down the line (God willing). It seems our only necessary expenses would be property taxes, food and gas.

My question is, is it really necessary to max out 401k and Roth IRA to have a comfortable retirement with no worries of money / an early retirement (IE: 60)? Even without the help of Social Security, I couldn't imagine needing that much money in retirement. And I would love to leave a nice windfall for my children, but i'd much rather be able to provide them with everything they need, including fully funded college education, weddings, vacations, etc.

Disclaimer: We are both extremely frugal people.

Thanks in advance for the responses, love this forum!
 

talltexan

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Re: Is Maxing Out 401K Necessary?
« Reply #1 on: February 22, 2018, 08:34:35 AM »
You sound frugal, which means your retirement expenses (and income) will be below your current income. Traditional > Roth in this case, as deferring the taxes now on the higher income makes sense.

YttriumNitrate

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Re: Is Maxing Out 401K Necessary?
« Reply #2 on: February 22, 2018, 08:53:26 AM »
So ball-parking your numbers, you are roughly asking if it is necessary to save 60-70% of your after tax income to have a good retirement. No, it is not.
« Last Edit: February 22, 2018, 08:55:52 AM by YttriumNitrate »

CorpRaider

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Re: Is Maxing Out 401K Necessary?
« Reply #3 on: February 22, 2018, 08:56:05 AM »
Yeah, it seems you're asking more about how much to save versus the optimal vehicle.  Depending on your tax rates now and in retirement/FIRE your pretax 401(k) could be superior to your Roth IRAs.  Pretty sure there is a sticky thread to walk you through that logic like an inch up the page (Investment Order).

Wayward

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Re: Is Maxing Out 401K Necessary?
« Reply #4 on: February 22, 2018, 09:15:30 AM »
You are both still young and time in market is key, I would say maxing the traditional 401k's should be a priority with the added benefit of lowering your taxable income! The investment order thread would be very helpful for you: https://forum.mrmoneymustache.com/investor-alley/investment-order/

GoCurryCracker is also a great blog to read about optimizing savings https://www.gocurrycracker.com/start-here/

RookieStache

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Re: Is Maxing Out 401K Necessary?
« Reply #5 on: February 22, 2018, 09:28:33 AM »
You are both still young and time in market is key, I would say maxing the traditional 401k's should be a priority with the added benefit of lowering your taxable income! The investment order thread would be very helpful for you: https://forum.mrmoneymustache.com/investor-alley/investment-order/

GoCurryCracker is also a great blog to read about optimizing savings https://www.gocurrycracker.com/start-here/

Thanks, I'll check his blogs out!

I completely understand lowering my taxable income, just seems out of reach (at the moment) to max it with our current income levels given our daycare expenses, unexpected housing repairs, combined with all other savings.


jim555

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Re: Is Maxing Out 401K Necessary?
« Reply #6 on: February 22, 2018, 10:25:16 AM »
You could skip 401ks and save in after tax accounts.  Remember long term capital gains and qualified dividends are tax advantaged as well.

dandarc

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Re: Is Maxing Out 401K Necessary?
« Reply #7 on: February 22, 2018, 10:37:45 AM »
What most do is set a budget that provides the lifestyle you want.  So long as there is a healthy gap between income and spending, you've got money to invest.

Then with investment dollars, you prioritize tax-advantaged accounts over taxable and things like paying the mortgage early.

One thing to consider - traditional accounts often get you to "enough" faster than Roth.  Even if you're not planning on an early retirement, having FU money can be a good thing.  So, think about doing traditional instead of Roth in your IRAs, and if you have anything going to taxable investments or extra mortgage principal, direct that to 401Ks / IRAs until the space is maxed out there.

frugalnacho

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Re: Is Maxing Out 401K Necessary?
« Reply #8 on: February 22, 2018, 10:45:13 AM »
I've read a couple of financial books and have really started to get into this forum as well as a couple of others. That being said, one take I constantly find is that you should max out your 401K and IRA before anything else (529's, paying extra on mortgage, HSA, stocks, etc.).

Who is advocating that?

You should prioritize contributing to your 401k up to the company match above all else.  You will be getting a 50-100% instant return on your money without even considering the tax savings.  It's free money.

You should prioritize maxing your HSA after that.  You not only save income taxes, but HSA through your work also avoids FICA taxes.

After that you should probably prioritize IRA and 401k depending on what the fees in your 401k are (if the 401k fees are higher than you can get in your IRA at vanguard, then fill your IRA first).

Depending on your income you may not even want/need to do that.  I am going to max 401k and HSA, and my wife's tIRA.  After that is done I will likely owe close to $0 in federal taxes, so I will likely end up putting most of my ira contribution into my roth ira.

dandarc

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Re: Is Maxing Out 401K Necessary?
« Reply #9 on: February 22, 2018, 10:48:49 AM »

DreamFIRE

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Re: Is Maxing Out 401K Necessary?
« Reply #10 on: February 22, 2018, 12:37:09 PM »

The fees can be killer on some 401K and the like retirement plans.  You definitely need to dig into the details.

When I started a job nearly 20 years ago, the individual funds tended to run near 2% E/R, plus there was a 1.5% management fee on the entire portfolio, which wasn't made clear.  I contributed to the match, but as my income increased, I didn't put in as much as I otherwise would have, and I started a Roth on the side and contributed to post-tax investments.   My current option through work is a little better now than back then, but with few years left until FIRE, there are fewer years left for the E/R and management fees to eat away at my principle.  I'll be moving it when I retire.

Boll weevil

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Re: Is Maxing Out 401K Necessary?
« Reply #11 on: February 22, 2018, 01:40:59 PM »
If you're planning on retiring early, I would think carefully about maxing out the 401k because there are penalties if you start withdrawing funds before age 55 or 59. Sure you can take a loan for certain uses like buying a house, but then you still have to pay the money back or pay the 10% penalty.

My strategy is:
1. 401k to max out the company match
2. Roth IRA
3. Split any additional investments between a regular brokerage account and the 401k.  How you split it is up to you... a few years ago my savings were probably 33% 401k (not maxed out) and 67% Roth IRA + regular account; this year I was planning on 50/50 with the 401k maxed out.

(I don't have a mortgage or HSA)

RookieStache

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Re: Is Maxing Out 401K Necessary?
« Reply #12 on: February 22, 2018, 01:48:34 PM »
If you're planning on retiring early, I would think carefully about maxing out the 401k because there are penalties if you start withdrawing funds before age 55 or 59. Sure you can take a loan for certain uses like buying a house, but then you still have to pay the money back or pay the 10% penalty.

My strategy is:
1. 401k to max out the company match
2. Roth IRA
3. Split any additional investments between a regular brokerage account and the 401k.  How you split it is up to you... a few years ago my savings were probably 33% 401k (not maxed out) and 67% Roth IRA + regular account; this year I was planning on 50/50 with the 401k maxed out.

(I don't have a mortgage or HSA)

I'd like to note that retiring early isn't a top priority right now, depending on how the next 30 years go.

I follow your strategy as well, except for the fact I have a mortgage and HSA. Max out Roth IRA, 12% 401K, and $40 non-retirement investments a month.

Daycare really eats into potential savings!

yachi

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Re: Is Maxing Out 401K Necessary?
« Reply #13 on: February 22, 2018, 03:12:21 PM »
RookieStache,
You might want to check out Firecalc.com or cfiresim.com both of these are calculators for figuring out how much you need to save to reach your retirement goals.  The more you save the faster you get there.
Also,
I started a 529 plan for our first child, but stopped when I found out the better benefits of Roth IRAs and 401(k)s.  You can use your Roth IRA for your children's education without the account counting against your child's financial aid whereas the 529 would count against their aid.  If you prioritize retirement accounts, you could retire before your kids hit college, but if you prioritize 529 plans, you don't have as much flexibility.  You can always stop all retirement contributions when your kids reach college age, and you'll be close to being able to pay for college as they go.

remizidae

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Re: Is Maxing Out 401K Necessary?
« Reply #14 on: February 22, 2018, 05:04:12 PM »
What was most striking about your post is that you expect your wife's income to "remain stagnant"--and she's only 27--and you expect to work till 60?! What's going on there? I know people have different levels of ambition, but 27 is awfully young to give up completely on career advancement. If you have a JOINT income of 100k, there's a whole lot of room for improvement, and a little more career focus could mean the difference between retiring at 60 or at 50.

JLee

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Re: Is Maxing Out 401K Necessary?
« Reply #15 on: February 22, 2018, 05:12:51 PM »
+1 to the career comments earlier.

I changed careers entirely when I was around your age and then doubled my income.  Don't have a fatalistic view that you're resigned to 4% raises for the rest of your life. It's not true.

With This Herring

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Re: Is Maxing Out 401K Necessary?
« Reply #16 on: February 22, 2018, 06:49:15 PM »
If you're planning on retiring early, I would think carefully about maxing out the 401k because there are penalties if you start withdrawing funds before age 55 or 59. Sure you can take a loan for certain uses like buying a house, but then you still have to pay the money back or pay the 10% penalty.
*snip*

This is not entirely correct.  Please don't hesitate to max out your 401(k) based on this notion.

There are two main ways to get money out of a 401(k) early WITHOUT paying a 10% penalty.

1) Begin withdrawals called "Substantially Equal Periodic Payments" (IRS link) calculated based on your age, among other factors.

2) Start a Roth IRA ladder (J.L. Collins link).  You roll your 401(k) into a traditional IRA, then each year you convert some of it into a Roth IRA (paying income taxes on that money as a distribution).  After that money sits in the Roth for five years, you can withdraw it without penalty.

Edit:  And now I see that we even have a sticky in this forum section addressing this very topic!
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

privatefarmer

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Re: Is Maxing Out 401K Necessary?
« Reply #17 on: February 23, 2018, 08:10:31 AM »
I've thought a lot about this issue. The "dilemma" I have is that I don't mind my work and it pays really well, so I think it's completely reasonable that I will stay employed at my current employer for 30+ years. Thus I decided to only contribute up to the match since this money really is not accessible until I leave my employer. The good news is that bc of a hefty match even if I only contribute the minimum up to the match I should have nearly enough to retire on in 30 years, just from my 401k. Thus all my other assets I now see as assets that I can take distributions from now to increase my take-home income and even if they are spent down over the next 30 years I should be okay.

The flip side to maxing out your 401k and saving on the taxes today is that this money may truly be inaccessible unless you quit your job and ending up w/ way more stache than you need in your old age while sacrificing your youth is not a good tradeoff, IMO.

Scandium

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Re: Is Maxing Out 401K Necessary?
« Reply #18 on: February 23, 2018, 08:39:55 AM »
Combined, we don't make a great deal, $100,000 before taxes.

No, I'm mean you're only in the top 25% in the country. And likely top few percent in the world..
http://money.cnn.com/calculator/pf/income-rank/

yachi

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Re: Is Maxing Out 401K Necessary?
« Reply #19 on: February 23, 2018, 08:45:06 AM »
I've thought a lot about this issue. The "dilemma" I have is that I don't mind my work and it pays really well, so I think it's completely reasonable that I will stay employed at my current employer for 30+ years. Thus I decided to only contribute up to the match since this money really is not accessible until I leave my employer. The good news is that bc of a hefty match even if I only contribute the minimum up to the match I should have nearly enough to retire on in 30 years, just from my 401k. Thus all my other assets I now see as assets that I can take distributions from now to increase my take-home income and even if they are spent down over the next 30 years I should be okay.

The flip side to maxing out your 401k and saving on the taxes today is that this money may truly be inaccessible unless you quit your job and ending up w/ way more stache than you need in your old age while sacrificing your youth is not a good tradeoff, IMO.

It's not completely inaccessible, it just has a possible additional 10% cost to access. 
Some plans offer in-service withdrawals so you can convert your 401(k) to an IRA.  You may also have the option of borrowing from you 401(k), then you only pay a 10% penalty if you separate from work and can't repay it in time.  I think you can withdrawal it at any time for a 10% penalty too.
A lot can happen to an employment situation in 20-30 years.  New bosses, systems, technology, location, competition can all affect it.

frugalnacho

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Re: Is Maxing Out 401K Necessary?
« Reply #20 on: February 23, 2018, 08:48:26 AM »
I've thought a lot about this issue. The "dilemma" I have is that I don't mind my work and it pays really well, so I think it's completely reasonable that I will stay employed at my current employer for 30+ years. Thus I decided to only contribute up to the match since this money really is not accessible until I leave my employer. The good news is that bc of a hefty match even if I only contribute the minimum up to the match I should have nearly enough to retire on in 30 years, just from my 401k. Thus all my other assets I now see as assets that I can take distributions from now to increase my take-home income and even if they are spent down over the next 30 years I should be okay.

The flip side to maxing out your 401k and saving on the taxes today is that this money may truly be inaccessible unless you quit your job and ending up w/ way more stache than you need in your old age while sacrificing your youth is not a good tradeoff, IMO.

A little ridiculous to plan to stay at the same employer for another 30+ years.  I know it happens, but something is very likely to change in the next 30 years.

Also if you have way more stach than you need, then you worked too long and should have retired sooner.

PDXTabs

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Re: Is Maxing Out 401K Necessary?
« Reply #21 on: February 23, 2018, 08:59:02 AM »
The flip side to maxing out your 401k and saving on the taxes today is that this money may truly be inaccessible unless you quit your job and ending up w/ way more stache than you need in your old age while sacrificing your youth is not a good tradeoff, IMO.

What? If you end up with way more stache than you need you worked too long.

But yes, the money is kind of locked up while you are working.

yachi

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Re: Is Maxing Out 401K Necessary?
« Reply #22 on: February 23, 2018, 09:35:00 AM »
Combined, we don't make a great deal, $100,000 before taxes.

No, I'm mean you're only in the top 25% in the country. And likely top few percent in the world..
http://money.cnn.com/calculator/pf/income-rank/

Wow look at that graph.  Just 1 full-time minimum wage job puts you over 10% of households!  And 2 full-time minimum wage jobs in your household puts you over the annual income of over 26% of all households!
Where do you think OP should be on that graph to be able to say his family doesn't make a great deal?  At the 50% level his family could be $6,000 short of a living wage. http://livingwage.mit.edu/counties/19075  At the 25% level OP and spouse would be working full time jobs for $6.85 an hour each.
Global income is interesting too.  It looks like one full time minimum wage job puts you in the to 9%.  http://www.globalrichlist.com/

Scandium

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Re: Is Maxing Out 401K Necessary?
« Reply #23 on: February 23, 2018, 10:01:28 AM »
Combined, we don't make a great deal, $100,000 before taxes.

No, I'm mean you're only in the top 25% in the country. And likely top few percent in the world..
http://money.cnn.com/calculator/pf/income-rank/

Wow look at that graph.  Just 1 full-time minimum wage job puts you over 10% of households!  And 2 full-time minimum wage jobs in your household puts you over the annual income of over 26% of all households!
Where do you think OP should be on that graph to be able to say his family doesn't make a great deal?  At the 50% level his family could be $6,000 short of a living wage. http://livingwage.mit.edu/counties/19075  At the 25% level OP and spouse would be working full time jobs for $6.85 an hour each.
Global income is interesting too.  It looks like one full time minimum wage job puts you in the to 9%.  http://www.globalrichlist.com/

Is this rhetorical or an actual question? In the millennial whining comments sections of Yahoo I'd expect people to complain 100 grand is insufficient, but here of all places I'm surprised that it's controversial to take issue with a top 25% salary being "not a lot".

What can be called not a lot? I don't know, it's all arbitrary anyway. At least below 50% off all households maybe ($55k)? Per your link the OP makes 94% more than the living wage (with 1 child. +64% with 2 kids), and additionally they say they live in a LCOL.

PDXTabs

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Re: Is Maxing Out 401K Necessary?
« Reply #24 on: February 23, 2018, 10:34:27 AM »
Is this rhetorical or an actual question? In the millennial whining comments sections of Yahoo I'd expect people to complain 100 grand is insufficient, but here of all places I'm surprised that it's controversial to take issue with a top 25% salary being "not a lot".

I think context matters. The median salary for a bachelor's degree in the US is $48K. If they both have a bachelor's and are working, their earnings are very average.

If they both dropped out of high school, they're doing very well.

If they both have JDs (and subsequent student loan debt), that might be sad.

Scandium

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Re: Is Maxing Out 401K Necessary?
« Reply #25 on: February 23, 2018, 10:38:52 AM »
Is this rhetorical or an actual question? In the millennial whining comments sections of Yahoo I'd expect people to complain 100 grand is insufficient, but here of all places I'm surprised that it's controversial to take issue with a top 25% salary being "not a lot".

I think context matters. The median salary for a bachelor's degree in the US is $48K. If they both have a bachelor's and are working, their earnings are very average.

If they both dropped out of high school, they're doing very well.

If they both have JDs (and subsequent student loan debt), that might be sad.

Uhm, your expenses have nothing to do with whether or not your earnings are "average". That would only dictate whether your lifestyle is average or not.. (also, I'm not sure how something can be "very average". It's average or it's not.)
And it's irrelevant since OP said they have only the mortgage debt.

yachi

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Re: Is Maxing Out 401K Necessary?
« Reply #26 on: February 23, 2018, 08:35:26 PM »
Combined, we don't make a great deal, $100,000 before taxes.

No, I'm mean you're only in the top 25% in the country. And likely top few percent in the world..
http://money.cnn.com/calculator/pf/income-rank/

Wow look at that graph.  Just 1 full-time minimum wage job puts you over 10% of households!  And 2 full-time minimum wage jobs in your household puts you over the annual income of over 26% of all households!
Where do you think OP should be on that graph to be able to say his family doesn't make a great deal?  At the 50% level his family could be $6,000 short of a living wage. http://livingwage.mit.edu/counties/19075  At the 25% level OP and spouse would be working full time jobs for $6.85 an hour each.
Global income is interesting too.  It looks like one full time minimum wage job puts you in the to 9%.  http://www.globalrichlist.com/

Is this rhetorical or an actual question? In the millennial whining comments sections of Yahoo I'd expect people to complain 100 grand is insufficient, but here of all places I'm surprised that it's controversial to take issue with a top 25% salary being "not a lot".

What can be called not a lot? I don't know, it's all arbitrary anyway. At least below 50% off all households maybe ($55k)? Per your link the OP makes 94% more than the living wage (with 1 child. +64% with 2 kids), and additionally they say they live in a LCOL.

I don't think 100k is insufficient, as my income has never been that high and I'm nearing FI, but I've seen a lot of very high income people posting on these forums.  100 grand in spending, yeah that would be a crap ton, but I see it different on the earnings side.

I found some of the data for the CNN graph here:
https://en.wikipedia.org/wiki/Household_income_in_the_United_States#Distribution_of_household_income_in_2014_according_to_US_Census_data
I found the "Mean number or Earners" column interesting

talltexan

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Re: Is Maxing Out 401K Necessary?
« Reply #27 on: February 27, 2018, 06:31:23 AM »
Is this rhetorical or an actual question? In the millennial whining comments sections of Yahoo I'd expect people to complain 100 grand is insufficient, but here of all places I'm surprised that it's controversial to take issue with a top 25% salary being "not a lot".

I think context matters. The median salary for a bachelor's degree in the US is $48K. If they both have a bachelor's and are working, their earnings are very average.

If they both dropped out of high school, they're doing very well.

If they both have JDs (and subsequent student loan debt), that might be sad.

It may seem like people have BA degrees all over the place, but actually fewer than 35% of adults do.

Car Jack

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Re: Is Maxing Out 401K Necessary?
« Reply #28 on: February 27, 2018, 07:17:09 AM »
Some questions so ponder....

If the 2 of you are planning to have 3 kids, does that mean one of you is going to stop working?  Or are you simply going to multiply your child care expenses by 3?  Either way, your income minus expenses is going to drop.

Once the kids are out of child care, the things to look forward to expense wise are college and health insurance once retired from employment.  You have plenty of years until college and can certainly adjust as you go.  In my state, community college is $5500 a year and an average associate's degree graduate can earn $40k a year.  State college, in state with room and board is $30k and let's just pick engineering... starting salary is somewhere near $70k in a Boston kind of market.  Private college greatly depends on the financial aid given.  If you assume nothing, that's $65k a year with an engineering starting salary in the $75k range.  And before the words "nobody pays full price" leaves your lips....I do. 

Health insurance is the huge wild card.  You don't want to go without.  A major half million dollar surgery can wipe you out.  And yes, hospitals will come after you for payment.  Go on to the connector to see what insurance would cost you.  Some states, it's not horrible, but I've seen people post where they claimed subsidies and then went over the income level only to get a bill for $28k the following year to pay back the subsidies.

So what do you do?  I'm a huge "safety net" guy, so I assume the worst and save for it.  I figured it would cost me $1M for college for my 2 kids, so as I hit a year and a half away from graduation for son #1, I'm happy with all that I saved, only paying 5 years at $65k a year.  I plan retirement in the next year or 2 and before that point, my wife will likely go back to work full time and pick up employer insurance.  She's stayed home with the kids doing only part time for 17 years.

I was late maxing out my 401k and didn't start a Roth until about 5 years ago.  But I got into buying US savings bonds back in the early 90's and today have several hundred thousand dollars worth of them, so that's part of my bond allocation.  I'd recommend saving everything you can.  Figure out exactly how much you spend a year.  Stick with a budget.  Put away as much as you can.  You don't know what future costs are going to be yet.  Plan for the worst and if you "over save", buy yourself a GT-R when you get to the point where you know you have more than enough.

RookieStache

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Re: Is Maxing Out 401K Necessary?
« Reply #29 on: February 27, 2018, 09:46:01 AM »
Some questions so ponder....

If the 2 of you are planning to have 3 kids, does that mean one of you is going to stop working?  Or are you simply going to multiply your child care expenses by 3?  Either way, your income minus expenses is going to drop.

Once the kids are out of child care, the things to look forward to expense wise are college and health insurance once retired from employment.  You have plenty of years until college and can certainly adjust as you go.  In my state, community college is $5500 a year and an average associate's degree graduate can earn $40k a year.  State college, in state with room and board is $30k and let's just pick engineering... starting salary is somewhere near $70k in a Boston kind of market.  Private college greatly depends on the financial aid given.  If you assume nothing, that's $65k a year with an engineering starting salary in the $75k range.  And before the words "nobody pays full price" leaves your lips....I do. 

Health insurance is the huge wild card.  You don't want to go without.  A major half million dollar surgery can wipe you out.  And yes, hospitals will come after you for payment.  Go on to the connector to see what insurance would cost you.  Some states, it's not horrible, but I've seen people post where they claimed subsidies and then went over the income level only to get a bill for $28k the following year to pay back the subsidies.

So what do you do?  I'm a huge "safety net" guy, so I assume the worst and save for it.  I figured it would cost me $1M for college for my 2 kids, so as I hit a year and a half away from graduation for son #1, I'm happy with all that I saved, only paying 5 years at $65k a year.  I plan retirement in the next year or 2 and before that point, my wife will likely go back to work full time and pick up employer insurance.  She's stayed home with the kids doing only part time for 17 years.

I was late maxing out my 401k and didn't start a Roth until about 5 years ago.  But I got into buying US savings bonds back in the early 90's and today have several hundred thousand dollars worth of them, so that's part of my bond allocation.  I'd recommend saving everything you can.  Figure out exactly how much you spend a year.  Stick with a budget.  Put away as much as you can.  You don't know what future costs are going to be yet.  Plan for the worst and if you "over save", buy yourself a GT-R when you get to the point where you know you have more than enough.

I appreciate the response. In regards to saving everything you can, I can promise you that this is what I do. Over the past 5 years, I have actually made money off my hobbies so my entertainment/hobby combined expenses come out as a net positive. I don't have a phone bill (wife pays $40 a month), use 3 Amazon Firesticks (no cable), my wife and I only ate out (paid for, that is) twice this past year for a combined less than $100. We go on two vacations a year that are paid for by our parents. We don't purchase anything but food for our child (hand me downs a plenty!). I ate out for lunch 7 times last year (my wife twice a week, but I'm working on that). Our entertainment on weekends generally consists of going to a friends house that has children or hosting which both are nearly no cost. We DIY pretty much everything that needs it regarding house maintenance. I buy used majority of the time and i haggle for a living so don't like paying full price.   

I've been an extremely frugal person since I was a child, so saving what I make is not an issue. It's more a matter of, I don't feel i can max out my 401K for quite a while without sacrificing all other aspects of saving.

If I were to max out my 401K, I would have to eliminate the savings for 529/HSA/Mutual Funds(only $10 a week)/refinance my mortgage (10 years left at $95,000 on a 15 year loan) and I'm still not sure that would be enough when coupling that to daycare / child expenses.  There is no room for lowering our cost of living as I have already done everything I can without making our quality of life "poor".

I guess my question is twofold:

1) Is sacrificing all other savings the only smart way to go to be able to max 401K/Roth IRA (I am already maxing IRA).

2) And more importantly: For a family as frugal as mine (in a LCOLA), is saving 12% of his 401K, 12% of her 401K, Maxing out his Roth IRA, contributing $3,300 a year to HSA, contributing $10 a week to mutual funds, $25 a week for each kids 529, eliminating mortgage at the age of 50, and having no other debts, not enough to head into retirement at the age of 60 while maintaining the same lifestyle?

PDXTabs

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Re: Is Maxing Out 401K Necessary?
« Reply #30 on: February 27, 2018, 09:47:29 AM »
Uhm, your expenses have nothing to do with whether or not your earnings are "average". That would only dictate whether your lifestyle is average or not.. (also, I'm not sure how something can be "very average". It's average or it's not.)
And it's irrelevant since OP said they have only the mortgage debt.

I've been contemplating whether or not this deserves a reply, because I can't imagine that you could just gloss over the opportunity cost of getting an education. I spent five years for my BS. Most PhD biomedical researchers will spend 12+ years once you count the three years postdoc where you are technically still a student and the federal grant that is funding you is exempt from FICA, so you might be in your 30s before you start paying into social security. I find it obvious that you need to make up for lost time at this point by saving MORE than you would have if you hadn't gone to school. The obvious way that you do this is by earning more, that's why you invested 5+ years of your life (and MONEY) into the education.

RookieStache

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Re: Is Maxing Out 401K Necessary?
« Reply #31 on: February 27, 2018, 10:05:14 AM »
What was most striking about your post is that you expect your wife's income to "remain stagnant"--and she's only 27--and you expect to work till 60?! What's going on there? I know people have different levels of ambition, but 27 is awfully young to give up completely on career advancement. If you have a JOINT income of 100k, there's a whole lot of room for improvement, and a little more career focus could mean the difference between retiring at 60 or at 50.

We are planning on having 1-2 more children over the course of the next 6 years. During this time, she would find it difficult to advance her career. And I assume that one of our jobs would have to remain flexible while having 3 young children. Her current job title is also very specific so she would most likely have to take make a lateral move or pay decrease to start from the bottom and work her way back up the ladder somewhere else.

I understand there is quite a bit of room for improvement and have been focused on increasing my salary. We do live in a LCOLA, which means wages aren't quite as high as some other major cities so I take that into account as well. In regards to your statement about retiring early, I never even really thought about that with the current wages we are making. I'm happy to work until i'm 60 if that's what it takes, just want to make sure my current contributions will be enough to do so.

yachi

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Re: Is Maxing Out 401K Necessary?
« Reply #32 on: February 27, 2018, 11:41:37 AM »

2) And more importantly: For a family as frugal as mine (in a LCOLA), is saving 12% of his 401K, 12% of her 401K, Maxing out his Roth IRA, contributing $3,300 a year to HSA, contributing $10 a week to mutual funds, $25 a week for each kids 529, eliminating mortgage at the age of 50, and having no other debts, not enough to head into retirement at the age of 60 while maintaining the same lifestyle?

The 24% of total income you're putting in your 401(k)s is plenty to retire at 60 and withdrawal today's equivalent of $66,000 from a 75% stock portfolio.  Add in the Roth IRA and it will be plenty to retire at 55 and withdrawal today's equivalent of $66,000 from a 75% stock portfolio.

Putting the 529 and Mutual fund money into the 401(k) instead would lower your taxable income and save you money, but it's not required for the age you're talking about retiring at.

RookieStache

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Re: Is Maxing Out 401K Necessary?
« Reply #33 on: February 27, 2018, 11:50:05 AM »

2) And more importantly: For a family as frugal as mine (in a LCOLA), is saving 12% of his 401K, 12% of her 401K, Maxing out his Roth IRA, contributing $3,300 a year to HSA, contributing $10 a week to mutual funds, $25 a week for each kids 529, eliminating mortgage at the age of 50, and having no other debts, not enough to head into retirement at the age of 60 while maintaining the same lifestyle?

The 24% of total income you're putting in your 401(k)s is plenty to retire at 60 and withdrawal today's equivalent of $66,000 from a 75% stock portfolio.  Add in the Roth IRA and it will be plenty to retire at 55 and withdrawal today's equivalent of $66,000 from a 75% stock portfolio.

Putting the 529 and Mutual fund money into the 401(k) instead would lower your taxable income and save you money, but it's not required for the age you're talking about retiring at.

Thank you for your responses Yachi. At the risk of sounding ignorant, I thought contributing to a 529 did lower taxable income as it's taken out pre-tax.

Scandium

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Re: Is Maxing Out 401K Necessary?
« Reply #34 on: February 27, 2018, 12:01:52 PM »
Uhm, your expenses have nothing to do with whether or not your earnings are "average". That would only dictate whether your lifestyle is average or not.. (also, I'm not sure how something can be "very average". It's average or it's not.)
And it's irrelevant since OP said they have only the mortgage debt.

I've been contemplating whether or not this deserves a reply, because I can't imagine that you could just gloss over the opportunity cost of getting an education. I spent five years for my BS. Most PhD biomedical researchers will spend 12+ years once you count the three years postdoc where you are technically still a student and the federal grant that is funding you is exempt from FICA, so you might be in your 30s before you start paying into social security. I find it obvious that you need to make up for lost time at this point by saving MORE than you would have if you hadn't gone to school. The obvious way that you do this is by earning more, that's why you invested 5+ years of your life (and MONEY) into the education.

uhm, sure. I'm not quite clear what you're arguing, but ok.
I mean obviously, I would hope you make more with a degree, otherwise nobody would get one! Yes there is opportunity cost, but that is usually (i'd guess 99% of time) trivial compared to the graduate premium. If your spending is the same you then have to save lower percentage of income, but you also have less time. How that works out depends. So I think I agree? I'm not sure

yachi

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Re: Is Maxing Out 401K Necessary?
« Reply #35 on: February 27, 2018, 12:37:40 PM »

2) And more importantly: For a family as frugal as mine (in a LCOLA), is saving 12% of his 401K, 12% of her 401K, Maxing out his Roth IRA, contributing $3,300 a year to HSA, contributing $10 a week to mutual funds, $25 a week for each kids 529, eliminating mortgage at the age of 50, and having no other debts, not enough to head into retirement at the age of 60 while maintaining the same lifestyle?

The 24% of total income you're putting in your 401(k)s is plenty to retire at 60 and withdrawal today's equivalent of $66,000 from a 75% stock portfolio.  Add in the Roth IRA and it will be plenty to retire at 55 and withdrawal today's equivalent of $66,000 from a 75% stock portfolio.

Putting the 529 and Mutual fund money into the 401(k) instead would lower your taxable income and save you money, but it's not required for the age you're talking about retiring at.

Thank you for your responses Yachi. At the risk of sounding ignorant, I thought contributing to a 529 did lower taxable income as it's taken out pre-tax.
From Here, no federal deductions for contributions
https://www.irs.gov/newsroom/529-plans-questions-and-answers
Q. What is the main advantage of a typical 529 plan?
A. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board at an eligible education institution and tuition at elementary or secondary schools. Contributions to a 529 plan, however, are not deductible.
But some states have deductions for contributions here:
https://www.savingforcollege.com/articles/how-much-is-your-states-529-plan-tax-deduction-really-worth

DreamFIRE

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Re: Is Maxing Out 401K Necessary?
« Reply #36 on: February 27, 2018, 10:29:11 PM »

I went into the HR dept. to max out my contribution to the retirement plan.   The girl in HR is surprised and asks, "are you sure you want to do this?" and before I even respond, she adds, "you can always change your mind before the next paycheck."   Pretty funny.   Maybe 1000 employees there - I suppose it's not very common.

privatefarmer

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Re: Is Maxing Out 401K Necessary?
« Reply #37 on: February 28, 2018, 01:14:17 AM »
I've thought a lot about this issue. The "dilemma" I have is that I don't mind my work and it pays really well, so I think it's completely reasonable that I will stay employed at my current employer for 30+ years. Thus I decided to only contribute up to the match since this money really is not accessible until I leave my employer. The good news is that bc of a hefty match even if I only contribute the minimum up to the match I should have nearly enough to retire on in 30 years, just from my 401k. Thus all my other assets I now see as assets that I can take distributions from now to increase my take-home income and even if they are spent down over the next 30 years I should be okay.

The flip side to maxing out your 401k and saving on the taxes today is that this money may truly be inaccessible unless you quit your job and ending up w/ way more stache than you need in your old age while sacrificing your youth is not a good tradeoff, IMO.

It's not completely inaccessible, it just has a possible additional 10% cost to access. 
Some plans offer in-service withdrawals so you can convert your 401(k) to an IRA.  You may also have the option of borrowing from you 401(k), then you only pay a 10% penalty if you separate from work and can't repay it in time.  I think you can withdrawal it at any time for a 10% penalty too.
A lot can happen to an employment situation in 20-30 years.  New bosses, systems, technology, location, competition can all affect it.

yeah unfortunately my employer does not allow for in-service withdrawals. my employer also offers very lucrative pay raises that are based on years of service which essentially "lock" me in to staying for the long-haul. it's a good problem to have. but needless to say, I only contribute up to the match as I see it as a very real possibility that I will be at this employer for 30+ years.

privatefarmer

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Re: Is Maxing Out 401K Necessary?
« Reply #38 on: February 28, 2018, 01:16:23 AM »
The flip side to maxing out your 401k and saving on the taxes today is that this money may truly be inaccessible unless you quit your job and ending up w/ way more stache than you need in your old age while sacrificing your youth is not a good tradeoff, IMO.

What? If you end up with way more stache than you need you worked too long.

But yes, the money is kind of locked up while you are working.

"need" is subjective. if you enjoy what you do at work, the hours are flexible/offers a nice work/life balance, and the pay is far higher than you'd get doing anything else, you may not have the desire to quit or retire early. I love the FIRE movement but I've always thought that it'd be better to just find something that you enjoy doing now and never retire vs trying to retire out of something you don't enjoy at an early age.

JLee

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Re: Is Maxing Out 401K Necessary?
« Reply #39 on: February 28, 2018, 07:09:58 AM »
The flip side to maxing out your 401k and saving on the taxes today is that this money may truly be inaccessible unless you quit your job and ending up w/ way more stache than you need in your old age while sacrificing your youth is not a good tradeoff, IMO.

What? If you end up with way more stache than you need you worked too long.

But yes, the money is kind of locked up while you are working.

"need" is subjective. if you enjoy what you do at work, the hours are flexible/offers a nice work/life balance, and the pay is far higher than you'd get doing anything else, you may not have the desire to quit or retire early. I love the FIRE movement but I've always thought that it'd be better to just find something that you enjoy doing now and never retire vs trying to retire out of something you don't enjoy at an early age.

If you have a guarantee that what you enjoy doing now is never going to change for the rest of your life, then I guess...sure?

I want options. If I decide I don't like what I'm doing, I don't want to have to keep doing it because I need the money.