Retirement, pension, Roth conventional IRA and 401K

Answered the wrong question there didn't we. 

In general for low tax individuals, the plan is 401K to the match, Roth, and then either more 401K or HSA or whatever makes the most sense due to options in the plan. Some 401K's have terrible choices, some don't so once your Roth is full you have to start looking at things individually. One other thing, your wife can contribute to a traditional IRA even without earned income (though I think she does have some, right?) but I'm not clear on the rules for a Roth conversion for non-income contributions. That might be worth checking out. 

AngryCorvair said:

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"

Gotcha.  I thought you were saying you weren't covered by social security.  You might reread that notice...doesn't sound quite right.  You could begin drawing benefits at age 62 albeit at 70% of full benefit that would be paid at age 67.  I've never seen that 77% language. ..

There seems to be some confusion here.  Tuna and I just talked offline.  

There's a Roth IRA and a Roth 401k.  Different animals.  The Roth 401k is like a traditional 401k but post-tax contributions instead of pre-tax.  

For a Roth IRA or Roth 401k, it makes more sense to contribute if your tax rate is low now.  In Tuna's case, with a house, a bunch of kids, and other deductions - meaning a low effective federal tax rate - the Roth 401k makes sense.  It is likely that when he retires (and has no deductions) his effective tax rate will be higher.

Not to be confused wth Roth IRA and Traditional IRA.  Similar deal (post vs pre tax contributions) but a different set of vehicles, with different limits and, in Tuna's case, neither offers the employer match.

Not all employers offer a Roth 401k.  Mine does not.  Only traditional.  In Tuna's case, he has a choice, and it sounds like the better choice is Roth 401k.  

volvoclearinghouse said:

There seems to be some confusion here.  Tuna and I just talked offline.  

There's a Roth IRA and a Roth 401k.  Different animals.  The Roth 401k is like a traditional 401k but post-tax contributions instead of pre-tax.  

For a Roth IRA or Roth 401k, it makes more sense to contribute if your tax rate is low now.  In Tuna's case, with a house, a bunch of kids, and other deductions - meaning a low effective federal tax rate - the Roth 401k makes sense.  It is likely that when he retires (and has no deductions) his effective tax rate will be higher.

Not to be confused wth Roth IRA and Traditional IRA.  Similar deal (post vs pre tax contributions) but a different set of vehicles, with different limits and, in Tuna's case, neither offers the employer match.

Not all employers offer a Roth 401k.  Mine does not.  Only traditional.  In Tuna's case, he has a choice, and it sounds like the better choice is Roth 401k.  

 

 

In the ten or so years that I have known you, I am not sure you've been more clear or accurate!

AngryCorvair said:

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 would take a second and evaluate that comment. I know for most people I work with including myself that will definitely not be the case. Right now my wages are going to retirement savings, work expenses and paying for people to do work because I don't have the time to do it myself (contractors, plumbers etc). I also have very little in the form of deductions because I'm kidless, and I take the standard deduction. All of that should change in "retirement" plus I should be able to manage my income in the form of distributions from taxable accounts and triggering gains. My plan is to be in a much LOWER bracket in "retirement"

In reply to Enyar :

Right, but that's easy if your current taxes are fairly high. In Tuna's case, (which I didn't fully understand previously) he currently pays taxes at a low rate (single earner, multiple kids, etc). If you currently pay 10% in taxes, it's going to be tough to pay less than that in retirement. If you currently pay 25%, your point absolutely stands though.

The current net tax rate for my federal income taxes is 4.2%. I certainly suspect that will increase in retirement.

Yeah, I do think those 4.2% are spelled "Roth IRA"...

If your employer matches up to 4%, that is very good these days. Definitely take advantage of that. A lot of people (me included) don't even have a match anymore.

I would then try to max out a Roth IRA, even if it might be at the expense of shoveling less money into an emergency fund. The reason for that is that you can withdraw contributions from a Roth IRA if you need to without incurring taxes and penalties. You do have to leave the earnings in the account, though. Can't do that with a Roth 401k, so that's a definite plus for the Roth IRA in my book.

Regarding HSAs, take a very close look at if you have one. A lot of the ones I've encountered seem to mainly offer a savings account with a pityful rate as the main "investment" choice and that is not a good place to park your money unless you absolutely need the contribution to get into a lower tax bracket. And even then it is not great.

In reply to tuna55 :

I'm working on both listening and communication.  I don't do the first especially well.  And the second is directly dependent upon the first.  

Being a (successful) engineer requires being able to communicate stuff with other fleshbags.  

In reply to Ovid_and_Flem :

In reply to BoxheadCougarTim :

I am not sure where everyone else gets all of this "shoveling" money, but mine gets spent on relatively basic things other than the barest of bare emergency funds.

Since so many people have gone there, we do have several varieties of health savings accounts, and we max them out and spend them all each year. Our family's health care costs are amazing.

I have an old IRA I am converting to Roth at about $5K per year, which will never deplete if the market keeps growing. I have the roth 401k and traditional 401k earning money, and a decent pension. That's about all I can do. No more shoveling money, other than into my house, into my kids, and into doctors and other fun expenses. if we can build a fund of more than a month of expenses, get hardwood floors upstairs (wife has severe autoimmune issues with household dust and the like) and get the van figured out this year we've had an amazing year.

You're kicking ass. Keep it up. 

Forgot to mention, My income went up $20K in the past two years, so we're just now really getting ahead of expenses.

In reply to mazdeuce - Seth :

Thanks, but wow, life is expensive. 

AngryCorvair said:

In reply to Ovid_and_Flem :

Thanks.  I've not seen that on my statement but I'm older than you as I will turn 67 in 2022.  I knew soc sec was solvent until 2034.  Wonder what legislative "fix" will be implemented...higher FICA tax, age increase for benefits, lower benefit, , or????  Time will tell.

One other thing to consider...

Effective tax rate and marginal tax rate...let's take Tuna's case where his effective tax rate is 4%.  Due to the bracketted nature of the system, the first 18k or so he makes is taxed at 10%.  18k to 76k at 15%.  76k to 153k at 25%.  And 153k to 233k at 28%.  

https://www.bankrate.com/finance/taxes/tax-brackets.aspx

This is before deductions, of course.  If he made, for example, 75k per year (to keep it simple) then he pays 1800 in taxes (10% of 18k) plus 8600 in taxes (15% of 57k) for a total of 10,400 in taxes, or an effective tax rate of 14%.  Using his _real_ effective rate of 4%, he's paying only 3000 in taxes due to deductions- kids, mortgage, gambling losses, whatever.  

HOWEVER- if he were to make $1 more in income, let's say- that $1 will be taxed not at 4% nor even at 14%, but at the full 15%.  And if his income is over 76k, then that next dollar is taxed not at 4% nor 14% nor even 15%- but the full 25% of the next bracket!  

I guess I would look and see what the adjusted income is, and play with the numbers to see what he actual dollar change in tax burden is given the two options (Roth 401k vs traditional 401k).  Then play some prognostication and think about what the income will be in retirement, using the same brackets.  

Of course, the rules might change.  Eventually some leader might come along who decides to balance the federal budget.  Taxes are not likely to go down any more in our lifetime.  They have a very real chance of going up, I'd say.  On the other hand, the odds of the government one day decreeing that all Roth future earnings are suddenly subject to taxation are very low, I'd wager.

My best educated guess is still slightly in favor of the Roth 401k over the traditional 401k.  But it's not something I'd lose any sleep over.  

In reply to Ovid_and_Flem :

As I understand it, in the 1980's, Reagan and Congress created a hike to the full SS age, from (IIRC) 65 to 67.  However, it did not affect anyone currently receiving SS, and was phased in very, very gradually.  Due to increases in life expectancy (and yes, I was recently called out on this point, but the fact is people ARE living longer on average, even accounting for accidental and infant death changes, people are, on average, drawing SS benefits for longer than they used to) probably the only politically feasible thing to do would be to increase the full SS age again.  Again, it'll probably be done slowly.  If you're getting full SS now, or about to retire, you won't be affected.  If you're 18 now and just starting to work, I would bet very strongly the full SS age will be somewhere between 70 and 75 by the time you get there.  if you're somewhere in the middle (Like Tun and Me and probably most of the people here) the full SS age will probably be somewhere between 67 and 70.  

Again, if I'm prognosticating, I would bet there will also be additional taxation or elimination of SS benefits above a certain income, though it will probably be high enough that it won't affect most people here.  That stuff gets very politically risky.  Increasing the age, especially over a long time, is the least painful method.  

Some info here:

https://www.nasi.org/learn/socialsecurity/future-finances

STM317 said:

In reply to Enyar :

Right, but that's easy if your current taxes are fairly high. In Tuna's case, (which I didn't fully understand previously) he currently pays taxes at a low rate (single earner, multiple kids, etc). If you currently pay 10% in taxes, it's going to be tough to pay less than that in retirement. If you currently pay 25%, your point absolutely stands though.

Oh absolutely (well, depending on his marginal rate). I was just saying that's not always the case for others in the thread.

In reply to volvoclearinghouse :

Good synopsis.  I was working as SSA congressional liason during the 80s when that legislation was passed...and the decision to make SStaxable.  Caused quite a maelstrom.  I agree will likely raise retirement age and increase taxation of benefits but will implement gradually to ease pain and public outcry.

In reply to Ovid_and_Flem :

One thing I find interesting, albeing confusing, is the difference between "full" benefits and "delayed" benefits.  "Full" benefits start at 66 and 2 months, if you were born after 1955, and increases to 67 for those born after 1960.  But anyone who delays SS until 70 can get more in their monthly check the longer they wait.  The increase stops after 70- waiting until after age 70 to receive SS doesn't make any sense, as that's when the amount stops increasing.  

The minimum SS age is 62, and will stay 62, but currently if one starts taking SS at 62 they ony get 80% of the "full" benefit.  That's going to decrease to 70% for anyone born after 1960.  

In reply to volvoclearinghouse :

Yup...terminology can get confusing. At age 70 there is no longer an earnings test to draw benefits.  That may change.

Curious, whats the increased benefit by waiting until 70?

It looks to me if you take the full at 62, then invest, using 4% rule, at age 67 you would get an additional 20.8%, so ever so slightly ahead.  At 70, you'd be at +31.3%, so 10% more than "full".

Not to mention a bunch of principal to tap into if you ever need to.

In reply to ProDarwin :

You lock in your monthly benefit at the time you start receiving it.  So if you take the reduced benefit at 62, it does not bump up when you hit 67 or 70 or whatever.  It only increases by the annual cost-of-living-adjustment, if there is one.  "taking the full benefit at 62" isn't an option.

Reduced Benefit:  If you elect to receive SS starting between age 62 and full retirement age, you receive the Reduced Benefit, and that's what you get per month until you die.  As seen in the pic above, for me that's projected to be $1949 per month.

Full Benefit:  If you elect to receive SS starting at your Full Retirement Age, you receive your Full Benefit, and that's what you get until you die.  For me, that's projected to be $2812 per month.

Delayed Benefit:  If you elect to delay receiving benefits until you turn 70, you receive your Delayed Benefit, and that's what you get per month until you die.  For me, that's projected to be $3505 per month.

If you think you'll die early, take the Reduced Benefit starting at 62.   The total you receive will be surpassed by Full Benefit at age 78, and by Delayed Benefit at age 80.

If you think you'll live a long time, wait til 70 and take the Delayed Benefit.  The total you receive will surpass Full Benefit at age 82.

AngryCorvair said:

In reply to ProDarwin :

You lock in your monthly benefit at the time you start receiving it.  So if you take the reduced benefit at 62, it does not bump up when you hit 67 or 70 or whatever.  It only increases by the annual cost-of-living-adjustment, if there is one.

That's my understanding as well.

Also note, it's based on the last 35 years of earnings.  

I'm not entirely clear how it works with regard to spouses, death, etc.  

ProDarwin said:

Curious, whats the increased benefit by waiting until 70?

 

It looks to me if you take the full at 62, then invest, using 4% rule, at age 67 you would get an additional 20.8%, so ever so slightly ahead.  At 70, you'd be at +31.3%, so 10% more than "full".

 

Not to mention a bunch of principal to tap into if you ever need to.

If you take payments at age 62, your payment will be 70% of what it would be in "full retirement age" of 67. If you were to delay payment until 70, you'd receive 124% of what you'd get at 67. No idea why they can't put that on a single table. Gotta make it difficult.