Author Topic: too much in my 401k?  (Read 6881 times)

eil

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too much in my 401k?
« on: March 04, 2015, 09:01:21 PM »
Fellow Mustachians, I apologize in advance for yet another "where do I invest my money thread," but I seek advice.

I am 35 and would like to retire in 10 years time when I'm 45(ish). My wife is a stay at home mom. We have two children, one who just entered Kindergarten and one who will follow in 3-4 years. My wife wants to start a business to bring in some cash and is having trouble deciding what to do but that's a topic for another time.

My current take-home pay (after taxes) is approximately $66,000. Between the two of us, we maybe get $1k or $2k extra per year for various odd jobs. I contribute 10% of my base pay to a 401k account (my employer matches something like 6%), which currently has a balance of $83,000. (Index funds ftw!)

We bought a house almost three years ago for around $150,000 and unfortunately had no down payment. (This was shortly before discovering mustachianism.) This means we're paying PMI each month. We will get this taken off one way or another in the coming months, probably through a refi. On the bright side, we have been paying down the mortgage aggressively and have it down to $124,000.

Other than that, we basically have no debt. We're working to bring expenses down but they are not outrageous. Problem is, aside from the 401k, we don't have much in the way of investments or savings.

I want to start seriously building our stash.

So I started doing some math. Using various compound interest calculators around the web yielded some surprising results about my 401k. Assuming my contributions stay the same and also assuming an average interest rate of 7%, I'll have roughly $360,000 in the account in 10 years (age 45, target retirement age). Hmm, not bad. Now, if at that point I stop contributing (because I'm retired), the balance will grow over the next 15 years to $993,000. Holy Toledo! That's way more than we'll need at that point, which tells me I'm putting too much into my 401k.

So, to put it bluntly, where should I be putting my money so that I can actually use it when I'm 45 without penalty? I researched IRAs and they don't look any different than a 401k to me. The IRA Escape Hatch Loophole strategy in MMM's article "How much is too much in your 401k" sounds interesting, and I get the part about converting a traditional 401k/IRA into a Roth IRA to avoid the taxes, but I thought you couldn't withdraw from a Roth IRA early without penalties? How does that part work?

Should I just open a standard non-tax-deductible Vanguard account and start throwing an extra post-tax $1-2k per month in there? Are there any minimums or gotchas that I should be aware of? Other ideas?

Thanks,
Charles

Chrissy

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Re: too much in my 401k?
« Reply #1 on: March 04, 2015, 11:49:03 PM »
You can withdraw your contributions from the ROTH anytime, but you cannot withdraw the growth without penalty until age 59.5.

Vanguard mutual funds typically have a minimum investment of $3,000.

Keep paying down the house until you can get rid of PMI.

If you understand how to convert your 401k, why do you say you can't access the money?  The way I take it, you only need a 5-year bridge fund...  http://www.madfientist.com/retire-even-earlier/

Put $5,500 in a ROTH for yourself, and $5,500 in a spousal ROTH for your wife every year.  In 10 years, when you retire, you'll have access to $110,000 in those accounts.


Retired To Win

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Re: too much in my 401k?
« Reply #2 on: March 05, 2015, 06:39:57 AM »
... Problem is, aside from the 401k, we don't have much in the way of investments or savings...


Regardless of anything else, your statement above indicates to me that you need to create and build up an Emergency Reserve savings account that covers at least 6 months' worth of your basic living expenses.  A year's worth (what I have) would be much better.  That Emergency Reserve is what is going to allow you to invest the rest of your money with a lot less worry and stress.

Good luck.

GGNoob

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Re: too much in my 401k?
« Reply #3 on: March 05, 2015, 07:39:40 AM »
You didn't post your annual expenses, but I don't see how you'll be able to retire in 10 years. I assume you mean you want to retire from your current job and then run your own business to bring in enough money for living expenses so you can continue to let your 401k money grow. If you start withdrawing from your retirement savings in 10 years, you will run out of money pretty quick.

Here's a good calculator to figure out when you'll be financially independent based on how much you are currently saving. http://lifehacker.com/how-much-of-your-income-to-save-based-on-when-you-want-1689402509#

Retired To Win

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Re: too much in my 401k?
« Reply #4 on: March 07, 2015, 03:18:41 PM »
... Assuming my contributions stay the same and also assuming an average interest rate of 7%, I'll have roughly $360,000 in the account in 10 years (age 45, target retirement age). Hmm, not bad. Now, if at that point I stop contributing (because I'm retired), the balance will grow over the next 15 years to $993,000...

Whoa there, eil.  After you retire at 45, how are you going to be paying for your living expenses?  Aren't you going to have to start taking "substantially equal" withdrawals from that 401(k)?  Since your wife is a SAHM, the money wouldn't be coming from her.  So... from where?

My point is, you are NOT contributing too much to your 401(k) because it isn't going to keep growing after you retire at 45.  It is going to start shrinking as you take those withdrawals.

Or did I miss something?

a1smith

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Re: too much in my 401k?
« Reply #5 on: March 07, 2015, 03:37:02 PM »
Regarding Vanguard funds, the Investor class funds have a minimum investment of $3K and the Admiral class funds have a minimum investment of $10K.  Many funds have both flavors.  The main difference is the expense ratio; Admiral funds are lower.

One way to get the lower expense ratio without the minimum investment requirement is to buy Vanguard ETF's.  Buying them through Vanguard and TD Ameritrade (32 of them) is commission free.  The ETF's have similar expense ratios to the Admiral class funds.

OneCoolCat

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Re: too much in my 401k?
« Reply #6 on: March 07, 2015, 06:40:41 PM »
... Assuming my contributions stay the same and also assuming an average interest rate of 7%, I'll have roughly $360,000 in the account in 10 years (age 45, target retirement age). Hmm, not bad. Now, if at that point I stop contributing (because I'm retired), the balance will grow over the next 15 years to $993,000...

Whoa there, eil.  After you retire at 45, how are you going to be paying for your living expenses?  Aren't you going to have to start taking "substantially equal" withdrawals from that 401(k)?  Since your wife is a SAHM, the money wouldn't be coming from her.  So... from where?

My point is, you are NOT contributing too much to your 401(k) because it isn't going to keep growing after you retire at 45.  It is going to start shrinking as you take those withdrawals.

Or did I miss something?

My understanding (of OP's line of thinking) is that he would stop contributing to his 401k now, let it sit until he is 59.5 at which point in time he estimates it will be valued at 900k+.  He would continue working now for 10 years and contribute to a taxable account.  Then when he is 45, he plans to retire and start drawing for the taxable account.  Then upon turning 59.5, he will draw from his 401k.

Doulos

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Re: too much in my 401k?
« Reply #7 on: March 09, 2015, 06:42:15 PM »
I too am at almost the exact same point.  Plenty of 401k money.

I understand lots of the frugal, saving, and investment stuff.  I do not quite understand the pre 59 1/2 part.

From what I understand before I came to the forums here (last week), is that retirement money is untouchable pre-59 1/2.
But that is not true according to answers I am seeing here.

The basic plan I see tossed around is Roth Capital = your money.  All the money you put it is yours still.
  • 2nd part of that plan is that you are allowed to take money from your 401k and put it in your Roth each year.  But then it is not 'your' money for 5 years.
  • So, what you do is... Take out as much as you can each year (post retirement), to get your income up as high as you can without hitting the capital gains tax?
  • Then after 5 years of doing that, you have a regular income from your 401k -> Roth -> you.

What you really needs is enough money in Taxable investments+Roth Capital to last you that 1st 5 years.
And enough transferred cash (401k -> Roth) to cover you each year.

Now problem is, I really do not see how that all adds up.
So, say for example you can get your expenses down to $30k per year.  That is $2500 monthly budget.  This is a respectably Mustachian number I believe.
Even with such low expenses, are you really able to transfer $30k through this process?

Let me rephrase this question.  Who is doing this right now?  As in, right now, you are surviving in retirement during this 5 year period?  Or someone that has actually successfully made it through that 5 years without any income at all (outside of investments)?
Someone that is doing it, or has done it, that could detail how it is done would be great.

MMM has plenty of information if you do have income during that time.  Which in my particular case I do plan to keep working, but it would be really nice to see some success stories explain the details; well, not specific details, more like a rough estimate of each year.

MDM

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Re: too much in my 401k?
« Reply #8 on: March 09, 2015, 07:00:27 PM »
Vanguard mutual funds typically have a minimum investment of $3,000.
Regarding Vanguard funds, the Investor class funds have a minimum investment of $3K and the Admiral class funds have a minimum investment of $10K.  Many funds have both flavors.  The main difference is the expense ratio; Admiral funds are lower.
The Vanguard Target Retirement xxxx Funds have a $1,000 minimum and are a very reasonable choice for beginning (or even experienced) investors.

See https://investor.vanguard.com/mutual-funds/vanguard-mutual-funds-list where you can filter by "Fund minimum".

rpr

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Re: too much in my 401k?
« Reply #9 on: March 09, 2015, 07:51:43 PM »

Let me rephrase this question.  Who is doing this right now?  As in, right now, you are surviving in retirement during this 5 year period?  Or someone that has actually successfully made it through that 5 years without any income at all (outside of investments)?
Someone that is doing it, or has done it, that could detail how it is done would be great.

MMM has plenty of information if you do have income during that time.  Which in my particular case I do plan to keep working, but it would be really nice to see some success stories explain the details; well, not specific details, more like a rough estimate of each year.

Here is a spreadsheet I created assuming your numbers.

Expenses of $30K which includes small amount of taxes (less than $1K/year). Stash is as follows:

Roth IRA contributions   $150,000.00
Roth IRA gains   $25,000.00
401k   Balance $575,000.00

Total = $750000 which is $30,000 per year assuming 4% WR

convert each year   $30,000.00

Also assumed the following
Married Filing Jointly
Roth IRA is invested in safe investments with return = 2.5%
401K is invested more risky with return = 5%

Balances Spreadsheet:

Quote
Year   Withdraw   Convert   Roth Contrib   Roth gains   Roth Bal   401k bal
1   $30,000.00   $30,000.00   $150,000.00   $29,375.00   $179,375.00   $572,250.00
2   $30,000.00   $30,000.00   $150,000.00   $33,859.38   $183,859.38   $569,362.50
3   $30,000.00   $30,000.00   $150,000.00   $38,455.86   $188,455.86   $566,330.63
4   $30,000.00   $30,000.00   $150,000.00   $43,167.26   $193,167.26   $563,147.16
5   $30,000.00   $30,000.00   $150,000.00   $47,996.44   $197,996.44   $559,804.51
6   $30,000.00   $30,000.00   $150,000.00   $52,946.35   $202,946.35   $556,294.74
7   $30,000.00   $30,000.00   $150,000.00   $58,020.01   $208,020.01   $552,609.48
8   $30,000.00   $30,000.00   $150,000.00   $63,220.51   $213,220.51   $548,739.95
9   $30,000.00   $30,000.00   $150,000.00   $68,551.02   $218,551.02   $544,676.95
10   $30,000.00   $30,000.00   $150,000.00   $74,014.80   $224,014.80   $540,410.80
11   $30,000.00   $30,000.00   $150,000.00   $79,615.17   $229,615.17   $535,931.34
12   $30,000.00   $30,000.00   $150,000.00   $85,355.54   $235,355.54   $531,227.90
13   $30,000.00   $30,000.00   $150,000.00   $91,239.43   $241,239.43   $526,289.30
14   $30,000.00   $30,000.00   $150,000.00   $97,270.42   $247,270.42   $521,103.76
15   $30,000.00   $30,000.00   $150,000.00   $103,452.18   $253,452.18   $515,658.95

Doulos

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Re: too much in my 401k?
« Reply #10 on: March 09, 2015, 08:18:03 PM »
So, what are the rules around this 401k -> Roth transfer ladder?
Most specifically, what are the limits on doing this at all?
What are the limits of doing this tax free?

I know the max right now is $5.5k contribution per person per year into a Roth.  (I am sure there are exceptions here).
So, how to you get around that rule to put large amounts into it from a 401k?

The way this is being presented it really seems like there is no such thing as too much in a 401k.

rpr

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Re: too much in my 401k?
« Reply #11 on: March 09, 2015, 08:22:02 PM »
So, what are the rules around this 401k -> Roth transfer ladder?
Most specifically, what are the limits on doing this at all?
What are the limits of doing this tax free?

I know the max right now is $5.5k contribution per person per year into a Roth.  (I am sure there are exceptions here).
So, how to you get around that rule to put large amounts into it from a 401k?

The way this is being presented it really seems like there is no such thing as too much in a 401k.

The limit does not apply for conversions.

kpd905

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Re: too much in my 401k?
« Reply #12 on: March 09, 2015, 08:23:20 PM »
There is not a limit to how much you can convert to a Roth, but you will pay income tax on it.  So the only amount that will be tax free is your standard deduction + personal exemption, or itemized deductions.

rpr

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Re: too much in my 401k?
« Reply #13 on: March 09, 2015, 08:34:46 PM »
There is not a limit to how much you can convert to a Roth, but you will pay income tax on it.  So the only amount that will be tax free is your standard deduction + personal exemption, or itemized deductions.

Exactly. And in the spreadsheet  I posted above, assuming MFJ, the amount of federal taxes paid on a 30K conversion in 2014 would be

Federal Taxable income = (30000 - 12400 STD - 2x3950 Exemptions) = $9700
Federal Bracket is 10%
Federal Taxes = $970.

Assuming that the couple was in the 25% bracket when contributing to the 401K, the taxes would have been = $7500.

Thus, taxes saved by deferring = $6530.

This is an awesome deal !!!

Mistah Cash Lion

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Re: too much in my 401k?
« Reply #14 on: March 20, 2015, 10:44:32 PM »
So, what are the rules around this 401k -> Roth transfer ladder?
Most specifically, what are the limits on doing this at all?
What are the limits of doing this tax free?

I know the max right now is $5.5k contribution per person per year into a Roth.  (I am sure there are exceptions here).
So, how to you get around that rule to put large amounts into it from a 401k?

The way this is being presented it really seems like there is no such thing as too much in a 401k.

This post really cleared things up for me on this whole issue:  http://livingafi.com/2014/05/18/drawdown-part-3-strategy/

Drew664

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Re: too much in my 401k?
« Reply #15 on: March 22, 2015, 04:11:09 PM »
So, what are the rules around this 401k -> Roth transfer ladder?
Most specifically, what are the limits on doing this at all?
What are the limits of doing this tax free?

I know the max right now is $5.5k contribution per person per year into a Roth.  (I am sure there are exceptions here).
So, how to you get around that rule to put large amounts into it from a 401k?

The way this is being presented it really seems like there is no such thing as too much in a 401k.

This post really cleared things up for me on this whole issue:  http://livingafi.com/2014/05/18/drawdown-part-3-strategy/

That is a good link - thanks!

There seems to be a pretty big learning curve in learning the terminology, plus the fact that the information isn't readily available from day to day conversations. You have to seek out specialized blogs and forums, such as this one to really drill down on the processes. It's been informative for me, that's for sure!