Time to increase your 401k contribution by 1%

[vacationer1954]

Is it? Most people don't plan for having an increase in income in retirement, and most people's ability to save doesn't support it. Generally, if you can replace 80% of your income, you've done really well (barring something like a salary replacment pension - in which case you are out of the IRA, 401k, Roth discussion completely).

There are some expenses that decrease moderately like commutation and perhaps clothing but the biggest expense we'll save in retirement is that we will no longer be saving for retirement and up until now most of the money we've saved for retirement has been deducted from our taxable income because they were contributions to 401ks, so no longer saving for retirement won't decrease how much tax we pay.

(In thinking about what we'll save money on in retirement I didn't forget about paying off the mortgage. We will pay off the mortgage before we retire but for us all that money is going to go towards private health insurance for the younger of us retiring before eligible for Medicare and for Medicare supplements.)

Anyway what will make the difference will be how much we withdraw from IRAs and 401ks each year. We've done a lot of financial planning in the last year and it looks like until 2030 we'll be taking only minimum distributions from our IRAs and 401ks and living on selling taxable investments. That'll keep our taxes pretty low since the capital gains tax rate is lower than the income tax rate. But we'll run out of that by 2032 and we'll be living off of IRA and 401k distributions. That makes our taxes in those later years double.

However, we'll still be paying less in taxes than we are now and I don't see how anyone wouldn't be unless tax rates go up a lot.

 

[crisi]

Yep,

You are also anticipated to spend less on "stuff" as you get older. It happens long before retirement, but there is a point at which you really don't need much - unless what you have wears out.

So between mortgage (which, ideally, should be paid off before you retire), 401ks, money put towards children and children's educations, work expenses (work clothing, work commuting, work lunches), most people say - even with the increase to health expenses - plan on 80%.

Honestly, I think ideally people should - particularly if they do what you imply and retire early or retire young and healthy - plan on more for a few years - a lot of people dream of travel and golf when they have time. But also honestly, I don't think its realistic for most Americans to save enough - without any pension plan - to be able to replace 100% of their income in retirement with a combination of 401k or IRA withdrawls and social security - unless they 1) want to risk running out of money before they die and/or 2) live very frugally during their working years - and I'm more of a "balance" person - I think people should definitely save, but not at the expense of putting off their lives until retirement.

 

[Jeff_G]

One big advantage a Roth would have in retirement;

if you are living on your SS and or 401k without paying very much in the way of taxes should you have a large expense, say purchase a new vehicle or need to pull money for travel or a large medical expense, you can pull money from the Roth IRA and not increase your taxable income, thus keeping you in that lower tax bracket.

Social security becomes taxable when your income (1/2 of your ss benefits plus other taxable income) is over 32k.

Here is some examples

if you are a married couple and receive $40,000 in Social Security benefits:
None of your benefits are taxable if your other income is less than $12,000.
For every dollar between $12,000 and $24,000, an additional 50 cents becomes taxable.
For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of $56,941, which makes the maximum $34,000 taxable.



Personally for people with years before retirement, I would max out both 401k and Roth IRA if you have the means and I would not count social security being around. Plan to live off of your retirements accounts and if you get anything from Social security its a bonus.

 

[Mickeyluver37]

One thing that I think isn't being considered here is the income limit, which previous threads have shown is pretty high on this board. If you are covered by a retirement plan at work, and filing married filing jointly, you cannot claim the IRA deduction if your modified AGI is over $115,000 combined.

http://www.irs.gov/Retirement-Plans...-You-Are-Covered-by-a-Retirement-Plan-at-Work

For many of us, since we can't deduct it now, it makes sense to fund a Roth anyway, but only after maxing out the employer retirement plans, regardless of what we think our future tax bracket will be.

 

[tvguy]

Bold #2 - you have your mother is far too risky investments for her age. She is probably not very diversified either, as you state "the mutual fund she put her money".

Just talked to the broker who appears on our newscasts every morning (and he is not the broker my mom or I use)

The required minimum distribution is about 3.75% of the total amount in an IRA. The typical "ultra safe and conservative" investment vehicle he recommends for his clients today pays 5%. So it appears that over 28 years my mom drew out of her IRA, it was always less than it earned each year. So it continued to grow, and compound for 28 years. Her Social Security more than covered all her expenses, her pension and a $125 a month annuity payment were extras, and it looks like she used her IRA as her risky investment since she was comfortable from her other income. And given that for the last few years before she retired even bank CD's paid 14 , 15 or 16 percent, it snowballed. Clearly the balance he left me in her IRA is more than it was when she retired. That is why early savings are so important.

 

[crisi]

One thing that I think isn't being considered here is the income limit, which previous threads have shown is pretty high on this board. If you are covered by a retirement plan at work, and filing married filing jointly, you cannot claim the IRA deduction if your modified AGI is over $115,000 combined.

http://www.irs.gov/Retirement-Plans...-You-Are-Covered-by-a-Retirement-Plan-at-Work

For many of us, since we can't deduct it now, it makes sense to fund a Roth anyway, but only after maxing out the employer retirement plans, regardless of what we think our future tax bracket will be.

Yeah, we are kind of going back and forth on investment vehicles - some people have a Roth option inside their 401k. Some just have a straight 401k, some need IRAs which can be traditional or Roth. As you pointed out - many of us will be over the income limit for any IRA if we have a retirement plan at work, and many of us will be over the income limit for ANY Roth, so that is moot for a lot of us anyway.

 

[Mickeyluver37]

Yep,

You are also anticipated to spend less on "stuff" as you get older. It happens long before retirement, but there is a point at which you really don't need much - unless what you have wears out.

So between mortgage (which, ideally, should be paid off before you retire), 401ks, money put towards children and children's educations, work expenses (work clothing, work commuting, work lunches), most people say - even with the increase to health expenses - plan on 80%.

Honestly, I think ideally people should - particularly if they do what you imply and retire early or retire young and healthy - plan on more for a few years - a lot of people dream of travel and golf when they have time. But also honestly, I don't think its realistic for most Americans to save enough - without any pension plan - to be able to replace 100% of their income in retirement with a combination of 401k or IRA withdrawls and social security - unless they 1) want to risk running out of money before they die and/or 2) live very frugally during their working years - and I'm more of a "balance" person - I think people should definitely save, but not at the expense of putting off their lives until retirement.

I think we'd be just fine living on 50% or even less of our income if we knocked out mortgage, saving for retirement, student loans, all work/commuting expenses, and of course those three children that are a constant cash flow- they should be self sufficient by the time we retire. We've been married long enough that there was a time that we lived on far less, and managed just fine!

 

[runwad]

Who knows about Roth 401k's? I have this option in my work plan. I do allocate some money towards it just because it is easier to have it automatically deducted from my pay. Will I be required to take RMD from the Roth when I age?

 

[supersnoop]

Who knows about Roth 401k's? I have this option in my work plan. I do allocate some money towards it just because it is easier to have it automatically deducted from my pay. Will I be required to take RMD from the Roth when I age?

Earnings in a Roth are tax free (money is taxed when you contribute), so required distributions aren't an issue. Just check to make sure you're maximizing your company match first. The company contributions will be in a regular 401k.

 

[alia]

will definitely try this... thanks for sharing ..

regards

 

[vacationer1954]

One thing that I think isn't being considered here is the income limit, which previous threads have shown is pretty high on this board. If you are covered by a retirement plan at work, ...

... even if you choose not to contribute to it ...

... and filing married filing jointly, you cannot claim the IRA deduction if your modified AGI is over $115,000 combined.

http://www.irs.gov/Retirement-Plans...-You-Are-Covered-by-a-Retirement-Plan-at-Work

For many of us, since we can't deduct it now, it makes sense to fund a Roth anyway, but only after maxing out the employer retirement plans, regardless of what we think our future tax bracket will be.

However even that ability goes away between $181,000 and $191,000.

 

[ktmo]

I just sent in my paperwork to increase my 403b. I am finally at the max.

We can't contribute to a Roth and the back door Roth confuses me and sounds too much of a pain.

I agree with those that say you will probably be spending more in retirement, especially if you retire young. My mom just retired and is already going here and there. My DH has expensive hobbies and I know that if he isn't working, he will be playing and that means more money going out.

My dad is still working at 70. He just can't give up the pay check even at part time. So he will have to have take distributions this year so that money will be taxed at his higher tax bracket.