Retirement, pension, Roth conventional IRA and 401K

I have all of those.

I don't want to spill exact numbers here, but currently, I am on target to receive a pension roughly 65% of what Fidelity thinks I will need when I retire. I also have an IRA which I am converting over to a Roth at the rate of about $5K per year, which may work as to never actually deplete the traditional IRA. Additionally, I have a 401K from the current employer worth about as much as the IRAs combined.

What should I be contributing to right now? My gut tells me the low tax situation for the time being means to contribute to the Roth now, and blend that back to the pre-tax is taxes go up in the future.

If you have access to an HSA, it can be one of the best places to park your money. It will reduce your tax burden and it's the only vehicle that you can invest money through without any taxes before or after (provided the money is spent on medical stuff).

In reply to tuna55 :

My gut tells me a balance is critical. Liquid cash even in the form of retirement presupposes that money will always be the most important part of retirement.  

It also assumes nothing will ever happen to force liquidation prematurely. 

The penalty for premature withdrawal is brutal. No matter how good your forecast ability  just remember when man plans the gods laugh. 

Current age?  Planned retirement age? Approximate Soc Sec benfit for you and spouse? (I ask because of potential tax consequences) Also...any match on 401k?

Dayum...just looked at your profile.  You're only 36...GOOD ON YOU FOR PLANNING EARLY!

I always liked this chart:https://imgur.com/g6j4IRu

You can find more things like this on Reddit/Financial Independence.

Unlike the other reddit forums, this one strives to get people aimed Financial Independence. Also, many strategies and not many asshats make this a good place.

In reply to tuna55 :

So you have a pension AND a 401K from work?  

Have you done a projection using a pessimistic 401K growth plus a pessimistic salary growth?

If you have, how much does that contribute over your pension?  

Then do the same estimates for the future of your IRA/Roth.  

I recall seeing some reasonable estimators out there, or you can use a growth model in Excel or something like that.  

As for your current situation, IF your employer has a match program, I'd put it there and get your annual bonus from them.  That can add up pretty nicely.

Seems like having a base of 65% pension as funding goes a long way to start with.

In reply to alfadriver :

Yes the current employer has both. The match is weak, they match half up to 8%. I am putting in 6% now. 

All of my analysis was done with 3% salary growth and 5% stock growth. It’s reasonable. So far both have far exceeded that. Fidelity has tools for all of the estimating. 

Still the the question remains. Roth or not or blend for current contributions?

Because Roth is funded with after-tax dollars, i think they should be funded when your in a low tax bracket, as you'll surely be in a higher bracket as you withdraw in retirement.

I wish I understood that earlier in life.

I am currently putting 10% of a good salary into my 401k, but I'm saving for both my wife and me.  My company matches 4% and it's immediately vested.  I have a decent chunk in a traditional IRA that is funded from previous employer 401k's and pension lump sum distributions.  I took the lump sums because I trust my management of it more than I trust the companies to not ass-berkeley their pension plans between now and my death.

my .xls has current contribution rate continuing another 15 years (I'm 51), 8% growth, 4% inflation, *not* selling the house to fund anything else, and NO SOCIAL SECURITY!  I start taking some money out at age 67, upping it to the required minimum distributions at age 70.5, and if neither of us need assisted living we will go broke when I'm 91 and she's 88.

berkeley, I hope I'm dead before that.

In reply to Johnboyjjb :

That is a very good flowchart.

And if you qualify, I would be putting the $5500 allowed into a Roth and not worry about blending with pretax.  You already blend by contributing to the 401k at work.  Contribute up to the max employer match, then max out the Roth ($5500), then if there's enough left over, get the 401k up to the max ($18.5K).  Then congratulate yourself on rocking at life.

A bit off topic (apologies): For retirement simulations, cfiresim or firecalc are both pretty helpful tools. You input your numbers and they'll run numerous simulations and spit out an average success rate for the specified length of retirement. It helped me figure out where we need to be to retire with ease @55 years old. Now, just have to save/invest enough to hit that number.

tuna55 said:

In reply to alfadriver :

The match is weak, they match half up to 8%. 

Weak?  Our match was frozen for three years and they just brought it back.  They match 1% which is way better than 0%.   

In reply to AngryCorvair :

No Soc Sec?  

@Tuna...I'd max out your 401K contribution to get as much of your employer's money as you can. After that there are pros and cons for your other options.

I retired almost 10 years ago when my employer was throwing around incentive money to get folks to leave voluntarily. My financial guy ran his model with the usual growth and inflation assumptions and told me not to take the buy out deal.  I wasn't completely comfortable with that advice so I paid a second guy to run an analysis. I went to see him armed with my asset list, pension forecast and my earnings statement. He took the info but his first question to me threw me off. He asked me how much I was currently spending and how much did I want to be able to spend in retirement. I had never looked at it that way. Most people focus on generating a gross income that comes as close to their working days gross as possible. Now, there's nothing wrong with that if you can do it, but most folks don't. When we focused on spending rather than income things started to look decidedly better. Knowing where and how much you spend, in some detail, will really help with the decisions on how to invest.

I'm comfortably retired on a total income that's less than half of my annual gross from 10 years ago. Still paying  on a mortgage, paying a boatload for health care, and going to the Challenge every year. Focus on your spending for a year. After I retired my wife logged every penny we spent for 4 or 5 years. I thought I understood where the money went until I looked at her book keeping. There were surprises that made me think before spending. I not doing without anything today, but I do look at spending power rather than income earning power.

Personally, when it comes to retirement I focus on maximizing tax advantaged accounts before anything else. HSA and 401k up to the company match minimum. It doesn't sound like you're quite there yet.

A Roth is nice and flexible. It can be used for things like kids' college if desired. And I don't think the money there  can be counted on the FAFSA like a 529 does. Might help the kiddos qualify for more aid that way.

Honestly though, I'm not sure a Roth makes more sense for retirement than a Tira unless your current tax rate is very low. Chances are that your taxable income will drop in retirement, so you'll probably pay taxes at a lower rate in retirement than you do now. Income from investment gains is taxed at LTCG rates, which is lower than income tax rates.

Review the MMM investment order for details: https://forum.mrmoneymustache.com/investor-alley/investment-order/

STM317 said:

Income from investment gains is taxed at LTCG rates, which is lower than income tax rates.

True, but important to note that withdrawals/disbursements from 401k's are considered income, not investment gains at retirement. 

In reply to STM317 :

Your point on reduced tax rates is a significant factor.  My tax rate is way down from my working days. The other thing to remember is working people spend less than they gross.(or should be) If you can retire with significant savings you get to spend more than you gross. After retiring I stopped putting anything in 401K, which was always maxed out, stopped paying the 6% to Social Security, stopped commuting 250 miles/week to and from the office , stopped eating one or two meals a day outside the home, etc., etc. my spending can be as high as it was in my working days, while my gross income is less than half. 

A well constructed Excel spread sheet can really show you how it can happen. It needs accurate tax rate calculations and spending forecasts, but it's not hard to do.

Ovid_and_Flem said:

In reply to AngryCorvair :

No Soc Sec?  

That is correct.  My latest SS statement says at full retirement age (year 2033 IIRC) my benefit is currently estimated to be $2800 per month.  

But I do not include it in my retirement planning because it also says something almost exactly like (working from memory here) "this is not a guarantee, and is expected to change because at current collection rates we will only be able to meet 77% of our projected obligations by 2033"

"I have all of those."

Based on those words, you, Sir, without even having to disclose your numbers, are on the right track and no doubt in good shape financially. Just keep working and contributing. I know this is a controversitial topic here (and anywhere for that matter), but from experience, I'd recommend getting a respected, credentialed, professional financial advisor to review your goals and circumstances. As with medical advice, do not, repeat, do not, rely on forum advice for your major financial decisions. Too many conflicting opinions based on personal circumstances and opinions. We're your friends, and are capable of enabling you 'til the cows come home on buying your next project car. But for your financial future (and yours sounds pretty good), rely on professionals. They will look at your situation objectively. It'll cost a point or so for a good advisor, but believe me, it's well worth it overall. Again, this advice is from experience.

Flynlow said:

And if you qualify, I would be putting the $5500 allowed into a Roth and not worry about blending with pretax.  You already blend by contributing to the 401k at work.  Contribute up to the max employer match, then max out the Roth ($5500), then if there's enough left over, get the 401k up to the max ($18.5K).  Then congratulate yourself on rocking at life.

This is my position as well. 401k up to the employer's match, since that is free money, then Roth up to the limit since you're in a low tax situation now with the kids and only one income. The flexibility of a Roth can be a blessing and a curse - since it's after tax dollars, you can withdraw up to your initial principal investments without penalty. Where that's bad is people without self control, but you do not strike me as that type. Once Roth is full if you have money left to invest then HSAs make sense as do 529s for the kiddos.

tuna55 said:

In reply to alfadriver :

Yes the current employer has both. The match is weak, they match half up to 8%. I am putting in 6% now. 

 

All of my analysis was done with 3% salary growth and 5% stock growth. It’s reasonable. So far both have far exceeded that. Fidelity has tools for all of the estimating. 

 

Still the the question remains. Roth or not or blend for current contributions?

Before I put to Roth, I'd max out the match.  It's 3% more for the price of 2%.  Or 50% on just putting money into it.  Once you are past that, then the Roth or not becomes a better question.  And FWIW, based on what our advisor has told us, the Roth is really good.

First max out the match. Then, go for the Roth 100%. 

Check your 401k; all 3 that I've had have had a pre tax/Roth option. 

The order of operations I usually tell people is this:

401k match

HSA

Roth

Remaining 401k

Taxable

In many cases #3 and #4 on that list can be interchangeable if you have access to good funds through a 401k and depending on your current income/spending vs. anticipated retirement income/spending.

There are extreme cases where #1 and #4 move to the bottom - if you have really E36 M3ty expense ratios in your 401k.

ProDarwin said:

The order of operations I usually tell people is this:

 

401k match

HSA

Roth

Remaining 401k

Taxable

 

In many cases #3 and #4 on that list can be interchangeable if you have access to good funds through a 401k and depending on your current income/spending vs. anticipated retirement income/spending.

 

There are extreme cases where #1 and #4 move to the bottom - if you have really E36 M3ty expense ratios in your 401k.

I don't think there is any case that would have me avoid the match--maybe if it only had exceptionally bad fund options?? Like Russian Bonds or something. 

Everyone has you covered. 401K to the match. HSA to where you need it (and with the kids this should be a big bucket) IRA for you, the rest of the 401K, IRA for your wife. In your case it also makes sense to strongly consider 529's for the kids. Once the spreadsheets say you and your wife are good, throw some money at their future. 

For most couples with one working spouse, those numbers would be $18.5 in 401k, $5500 each for IRA, whatever your HSA limit is, say $5k, and $2k for each of the four kids. That's $42.5k plus the match money. How you fill those buckets is less important than filling them (other than the 401k which is free money) as you're guessing at future tax issues. Not that it's bad to guess, but don't forget you're planting a forest here. 

Wow, so let's ground this all a bit.

I don't have enough take home money to max out all of those things. There is no way in the universe that I can cut $42.5K out of my net pay for retirement.

This question is really irrespective of the rest of the advice I am getting here, most of which is good but largely out-of-scope. I would love to discuss expenses, college stuff, medical stuff, 529, HSA, HRA, FSA etc, but I am trying to limit the discussion to just this point for now.

My employer match can be applied to Roth or to a traditional 401K. Which is appropriate?

My assumptions are that the Roth makes the most sense because my taxes are really quite low with four kids and the recent tax cuts.