Inhave that in saving, but im talking just in terms of retirement funds
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How to Invest for Retirement
- Thread starter Piecake
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Inhave that in saving, but im talking just in terms of retirement funds
Walter White Walker
Member
https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementIncomeCalc.jsf
Plug your info in and that will give you an idea of where you're at.
Randolph Freelander
Member
So are we. (If you have 1 year in an actual savings account, consider moving it.*)
Recent guidance from Fidelity (which is just one source, so of course consult others) is someone your age should have 1 year of income in a retirement account. Apparently, this is more conservative than their guidance just a few years ago, which would have suggested a fraction of a year would have been on target.
https://www.fidelity.com/viewpoints/retirement/how-much-money-do-i-need-to-retire
That image gives you an overall idea, with more information at the link.
--------------------
*Do you have an IRA? Have you fully funded 2015? If not, consider doing so, and then start funding 2016.
*Do you still have an excess in your savings account after dealing with an IRA? Are you OK with locking up some of that excess until you retire? Consider boosting your 401K contribution beyond what you could otherwise do and draw down your savings to cover expenses.
*Not OK with locking those funds up or feel uncomfortable manipulating your pay, 401K, and savings account in concert with one another? Consider regular market investing in the same type of funds you might otherwise use for retirement.
Wellington
BAAAALLLINNN'
There was some interest in Robo-Advisers here a while back. The guys from LMM did an interview of the Wealthfront CEO - https://www.listenmoneymatters.com/wealthfront-review/ Worth a listen, they had some really good questions for him.
Roth IRA is in play there as well.
Roth IRA is in play there as well.
Darren870
Member
I never got the thought you would need so much a year in retirement. I mean, sure I make good money now, but I would imagine I could live on 1/8 that in retirement. I would like to think my home would be paid off and it would just be upkeep and tax.
Then just food and leisure I'd guess. Can't see need more then like 30k.
Then just food and leisure I'd guess. Can't see need more then like 30k.
MrPink93485
Member
Hm, I'm 25, and I don't see myself hitting 1x my annual salary by age 30. Maybe 65-75% of my annual salary depending on how the market performs between now then. Granted, I spent a year and a half not contributing at all, and I regret that.
Just switch into a lower salary job sometime when you're 29.
MrPink93485
Member
Hah, I'm hoping when I'm 29 I'll have a fairly comfortable salary where I can up the contribution further.
Randolph Freelander
Member
So are we. (If you have 1 year in an actual savings account, consider moving it.*)
Recent guidance from Fidelity (which is just one source, so of course consult others) is someone your age should have 1 year of income in a retirement account. Apparently, this is more conservative than their guidance just a few years ago, which would have suggested a fraction of a year would have been on target.
https://www.fidelity.com/viewpoints/retirement/how-much-money-do-i-need-to-retire
That image gives you an overall idea, with more information at the link.
Something that's always bothered me about this kind of advice. I get that Fidelity and others are trying to offer a simple rule of thumb for people to check against to see if they are on track for retirement. But incomes fluctuate a lot over the course of a lifetime. Generally speaking, people will make more as they grow older (obviously not true for everyone, just a generalization here), which means both income and the ability to save goes up; it's not linear over our lifetimes. So while it's a simple rule of thumb I've actually found it to be a confusing, or at least odd, way to look at retirement savings.
I really noticed it when I got a promotion and thus a sizable raise a few years back. We put 75% of that raise to savings, nearly all of which was retirement. This really boosted the rate of our investment, but using the multiples of income as a yardstick for retirement savings, we instantly fell behind. I actually felt worse after an initial analysis using the rule income of thumb, before I realized what was happening.
The rule of thumb assumes people want to maintain their standard of living in retirement, which is probably a good assumption, but it also assumes they'll have the same expenses, which isn't. I think there are better methods, such as the 4% rule, which don't fluctuate based on income at a given point in time, but rather look at desired standard of living in retirement. They help set a target that doesn't move unless you make adjustments to it, and you can track how far along you are relative to that. Not as simple to infographic, though.
This is very much a footnote to your larger point, of course. Just thought I'd comment as it can be a discouraging way to measure progress depending where you are at.
anonymous_abc
Member
So it's looking likely that I will be moving to the US for a few years.
I will be getting a local contract, now I know they offer a 401k, but what should I be sure to ask when we finally get down to business and start talking details?
Will I want to Roth IRA as well? Does my employer have anything to do with that?
Should I try and max out both once I arrive asap to be sure to fully utilise 2016?
Does my employer suggest companies to work with or can I ask for specific companies?
What do I want Vanguard?
I've never really paid that much attention to your US centric roth IRA/401k discussions. So now I'm looking to play catchup.
I will be getting a local contract, now I know they offer a 401k, but what should I be sure to ask when we finally get down to business and start talking details?
Will I want to Roth IRA as well? Does my employer have anything to do with that?
Should I try and max out both once I arrive asap to be sure to fully utilise 2016?
Does my employer suggest companies to work with or can I ask for specific companies?
What do I want Vanguard?
I've never really paid that much attention to your US centric roth IRA/401k discussions. So now I'm looking to play catchup.
Randolph Freelander
Member
I completely agree with your point, as it also describes my situation. My salary and saving situation is drastically different than just a few years ago. The Fidelity age thing would put me well behind target, but other retirement calculators based on my age, income, savings, and retirement date have me in good shape.
That said, I'd love to be on par with the Fidelity recommendation, because it would have meant that I was smarter about investing in my younger years. Ah, to be young and stupid.
Darren870
Member
As someone who has retirement accounts in three countries, just stick to your 401k.
Don't do a Roth or even a 401k if the company doesn't match. Take the free money if they do.
It's a pain in the ass to keep track of them all, and its not like you can take them when you leave.
Of course if you're staying for the long term then that's a different way to look at things.
anonymous_abc
Member
Something I am not inclined to decide at the current time.
By 'take them when you leave' what do you mean?
Let's say I leave the US and go back to Germany in 5 years. What would happen if I had a 401k and a Roth?
Darren870
Member
You have to leave them there until you retire so they can grow but you can't contribute anything to them.
You may also get hit with tax twice at withdrawal age, but that's something you'd have to look into more. It varies by country. Let's just say the US fucks you when it comes to tax.
Really? What funds are you invested in? I have an 80/20 equities/bond split and the market has mostly recovered from the early February lows. I'm only down -1.51% now YTD.
If you were around in 2008 this wouldn't even count as bleeding.
I think they did address your two main points. First the model assumes a real increase in salary of 1.5% annually, so the idea of having a non-linear increase is baked in to the analysis. Of course they are not going to be able to account for someone getting a big one-time increase in salary, but then again, the milestones here are listed every 5 years, not every day. Although you may initially fall behind after getting the raise, you will eventually catch up.
As far as the argument about spending, the footnotes have this to say:
So they are actually basing it on expenses and notably people's expenses are pretty proportional to their income all the way up to $300K (which is incidentally why people have so much difficulty saving for retirement). You can make an argument that expenses may change somewhat for a constant standard of living. You may spend less on gas if you don't have to drive to the office every day, but on the flip side you may end up paying more out-of-pocket medical expenses as your healthy and physical capabilities decline.
I have one account that got opened around May or June of last year that is solely Vanguard Total Stock Market, and it is still down something like 5.5%. The market hasn't yet recovered from the bad luck timing points of 2015.
Sure I'm not arguing that the second half of last year was pretty crap. But the poster said he wanted to stop this bleeding, when the market actually has been improving for almost a month now. We're definitely not bleeding anymore.
PflargBlarg
Member
You should know that should you do this, we are obliged to send someone to find you and kick you in the balls.
Come on man, have you read this thread at all? Unless you need this money very soon, forget about it! Yeah, I have losses too but I look at it in a very abstract way, my investments are barely even money in my mind at this point since I won't be needing them for at least another 15-20 years.
If that is indeed a real income adjustment (factoring in inflation) then it does start to address the issue I had there. Good to know.
This is actually why I don't like this method, or at least why it's not applicable to my situation and experience. My standard of living has changed little in the past 10 years, as my wife and I have diverted the bulk of our income increases to savings. So I can take a pay cut and still maintain the standard of living (just sans savings).
It's for this reason that I prefer the opposite approach as the Fidelity chart: establish what you want your standard of living to be in retirement, which is a fixed annual income target. Then you can figure out who much to have saved in order to maintain that, starting at any given age. This forces a more conscious discussion about what standard of living to have in retirement, rather than just keeping things flat. (Which as I said is a reasonable assumption for most - I just don't think it should be a given.)
RustyNails
Member
Quick possibly dumb question, is there a way to "contribute" towards a mutual fund? Like add $100/month to it for example.
Yes.
RustyNails
Member
Does Vanguard offer such mutual funds? Or can you set it to add weekly/monthly?
Yes, after making the initial minimum contribution.
https://personal.vanguard.com/us/insights/article/automatic-ira-contributions-012014
RustyNails
Member
Thank you kindly.
Maybe this is the better place to ask. I just found out that you get tax deductions if you do traditional Ira, and would like to recharacterize all of my Roth (from November 2014-present) into traditional, and get the tax deductions for 2015.
Anybody have any insight? Will only the amount that went into the Roth go into my traditional, or will it retroactively add the amount of money that would have been added pretax?
I want to switch to traditional regardless. So instead of having a Roth with some money and traditional going forward, isn't it better to do this and also get money back?
Anybody have any insight? Will only the amount that went into the Roth go into my traditional, or will it retroactively add the amount of money that would have been added pretax?
I want to switch to traditional regardless. So instead of having a Roth with some money and traditional going forward, isn't it better to do this and also get money back?
Randolph Freelander
Member
You can recharacterize your 2015 contribution by the tax deadline (and continue contributing to it up to the IRS limit). Your 2014 contribution is off the table. Nothing is going to be added, it's up to you to fund your IRA, but by doing so traditionally, you could be able to deduct the amount from your earnings which would reduce your tax burden.
Is it worth it to you to avoid taxes now and pay them later? Keep in mind that if you are covered with a retirement plan at work (or your spouse is), then the income threshold for being able to deduct the contribution is going to be lower than if you are not covered. A lower income threshold also means that even if you qualify, you're only avoiding lower marginal rates that might best be paid now rather than paying taxes later after your income has grown.
Here are the relevant IRS pages:
Traditional IRA - covered by plan at work https://www.irs.gov/Retirement-Plan...-You-Are-Covered-by-a-Retirement-Plan-at-Work
Traditional IRA - not covered by plan https://www.irs.gov/Retirement-Plan...-Are-NOT-Covered-by-a-Retirement-Plan-at-Work
2015 Marginal Rates https://www.irs.com/articles/2015-federal-tax-rates-personal-exemptions-and-standard-deductions
Thanks for the info!
Last night when I was doing the math I came to the conclusion that traditional would be better. But now that I'm thinking I can't think of why.
I'm single with 0 dependents. I figured with traditional, not only do I get a tax break, but more money is going to my IRA. Obviously when I retire, the money will be taxed. But will it be taxed so heavily that it will negate the tax breaks I had received throughout my career? Assuming I stay at the same tax bracket, and single my whole life?
Last night when I was doing the math I came to the conclusion that traditional would be better. But now that I'm thinking I can't think of why.
I'm single with 0 dependents. I figured with traditional, not only do I get a tax break, but more money is going to my IRA. Obviously when I retire, the money will be taxed. But will it be taxed so heavily that it will negate the tax breaks I had received throughout my career? Assuming I stay at the same tax bracket, and single my whole life?
The thing to remember is that $1 in a Roth account has a higher future value than $1 in a traditional account, so even if you are contributing more to the traditional account by including the money you saved in taxes, it will have the same future value if you are assuming the traditional withdrawal is taxed at the same rate as the Roth contribution. It's worth noting that despite Roth dollars being worth more, the two account types have the same annual maximum of $5500. So if you are able to hit that maximum either way, you are actually putting more money in if you use the Roth account.
If the withdrawal was taxed at the same marginal rate, then yes, it would negate the tax break on the contribution. However, because of the way the progressive tax system works, the effective tax rate on the traditional account will usually be lower than the tax rate on the contributions if the retirement account is your primary source of income in retirement. This is because the first $X dollars get taxed at the lower rates, and only the amount you withdraw above the threshold for your current marginal tax rate will be taxed at that rate.
What are your thoughts on the combination Roth and traditional IRA/401k approach? It was a strategy I first learned about in a retirement seminar at work, several years ago. The idea is to have both a Roth and a traditional retirement account, and use the two together to minimize tax burden in retirement. For example by drawing on the traditional account up until the max income for the first tax bracket (10% or 15% or whatever it is in the future), and then topping off the year with Roth withdrawals, which are not taxed. That way the contributions made to the traditional accounts are getting a larger advantage and are basically guaranteed to have a lower tax burden than the contributions that went into them. It also serves as a hedge, should tax rates change unfavorably in the future.
But it's one of those strategies that seems to make sense on paper, but I've never actually worked out whether it plays out more advantageously. I think the lower tax burden on the traditional makes it so, but I've never sat down and run scenarios to see if that's the case.
TangoAlphaLima
Member
The Roth has so many advantages that I definitely think it's best to utilize it first before saving in an IRA/401(k), but once you hit the Roth max, then by all means you should add to your IRA/401(k). The only disadvantage to the Roth is that you can't lower your current tax burden, that's it. In every other way, it is superior to an IRA/401(k).
And one important thing to remember about your IRA/401(k) is that you will be forced to take required minimum distributions. And don't forget to add in social security income as well as any pension benefits you may have when factoring in what tax bracket you'll be in. You may not have a ton of control over what tax bracket you'll be in when you add up these factors, assuming you have a pretty healthy IRA/401(k).
Another thing to remember is that, if you're money smart enough to be focused on retirement savings at a young age, you'll probably be money smart enough to not need much to cover your expenses during retirement. Your house should be paid off, your kids will have gone through college, and you shouldn't need to buy a new car very often. In short, the combined income from social security, pension (if any), and IRA/401(k) required minimum distribution may actually be substantially more than what you need to live off of (albeit you may choose to splurge on travel and luxury items if you're sitting on a load of retirement savings). In this case, the Roth is fantastic, as it does not have required minimum distributions, can sit there and continue to increase in value tax free, then can be passed to your heirs upon death, at which time they can stretch out distributions during their remaining lifetimes.
In short, I'd advocate a combined strategy of Roth and IRA/401(k), but that's mostly because I think the majority of people (i.e. not necessarily all, depending on tax bracket) should be contributing the max to a Roth first, then contributing to an IRA/401(k).
Damn, it sounds like in the long run, Roth is the way to go, am I understanding that correctly? I guess I saw the possible $1100 tax refund with traditional and got a little crazy. I only owe 45$ in taxes so it's not that I have a burden. I just wanted that money lol.
I put in about 4500 last year, and will probably be going over the 5500 this year if I get a new job. I'll have to start up a traditional at that point. Damn, was really looking forward to that 1000$..
Randolph Freelander
Member
You don't go over the contribution limit. The IRA, whether it is traditional or Roth, is limited by the IRS, currently set to $5500 for 2016 ($6500 if you're 50 or older) but may increase in future years (it follows inflation, but will only increase in $500 increments).
The thing you should be looking at (if you haven't already) is an employer-provided 401K plan, which allows you to contribute up to $18,000 ($24,000 if 50+) of your own funds in 2016. The typical plan is before tax (or traditional), though many plans are also now offering a Roth option (after tax). You especially want to take advantage of the 401K if your employer offers a match.
I think I have been using the wrong terms. I am in an employer Roth plan. I keep reading that if it's from the employer it's a 401k, however my paystub says that I am contributing to a Roth IRA. I also get the employer match. This is all so confusing lol. Do traditional 401k also get the same tax deduction as traditional IRA?
Randolph Freelander
Member
Yes, the money you put into a traditional 401K is tax deductible, even more so than the traditional IRA, because it doesn't phase out.
Based on your phrasing, you might want to double check with your employer to be sure exactly what type of plan you are participating in. For most of us in this thread, it's a 401K. But you might be in a SIMPLE IRA plan instead, or perhaps there could even be yet another employer retirement plan available. The SIMPLE IRA, from what I can tell, seems to be somewhere in the middle of a regular IRA and a 401K, in that it is limited to $12,500 in contributions for 2016.
TangoAlphaLima
Member
Yeah, that's what is known as a Roth 401(k).
https://en.wikipedia.org/wiki/Roth_401(k)#The_Roth_401.28k.29_plan
A traditional 401(k) gets the same tax deduction as a traditional IRA, and a Roth 401(k) gets the same tax treatment (taxed up front, but no taxes upon disbursement) as a Roth IRA. The only difference is that with a Roth 401(k), your employer's matching contributions are put into a separate pre-tax account and do not benefit from the same Roth tax treatment (essentially that money is in a traditional IRA).
You get two benefits with the Roth 401(k) over a regular Roth IRA. One, you're getting an employer match. And two, the limit for a regular Roth IRA is $5,500 ($6,500 if you're 50 or older), whereas the Roth 401(k) has a limit of $17,500.
We recently switched to contributing to the traditional IRA first, because we expect our income in retirement to be significantly less than it is currently - about half. So it's advantageous for us to contribute pre-tax dollars now, avoiding a high tax bracket, and paying taxes upon withdrawal in retirement, at the lower tax bracket.
TangoAlphaLima
Member
Are you using inflated future dollars when determining your social security retirement income? Tax brackets will obviously shift upward over time as well, so that's something to factor in as well.
For me, I just don't see the benefit of building a huge war chest of traditional IRA money. Upon retirement, my wife and I will both be drawing social security benefits, she has a pension, and we'll have some traditional IRA disbursements. Also, the time for maxing out Roth IRAs is limited. Combined we can only do $11k per year, since neither of us have access to an employer 401(k). As our incomes rise over the years, we'll be able to put more into a traditional IRA, but we'll never be able to go back and put additional into a Roth IRA for a prior year we didn't max out.
I guess part of the way I look at it when prioritizing Roth over a traditional IRA is that time is limited, and I'm far more capped with a Roth than with a traditional IRA (unless I were to suddenly have a Roth 401(k) available to me). I've got roughly 30 years until retirement age (but I suspect that it will be closer to 35-40 years as life spans continue to lengthen). Just using today's dollars and limits, that's $180,000 I can contribute to a Roth. Using a SIMPLE IRA, which is available to anyone, even the self-employed (with minimal setup and administration), the max I can contribute over the same time period is $375,000 (not including a 2% or 3% employer match that is required under SIMPLE IRA rules). So if I want balanced retirement savings between both Roth and traditional IRA, I've got to front load Roth now, or my Roth contributions will never be able to catch up to my traditional IRA contributions.
That is actually the strategy that I personally use. I contribute to a traditional 401K via the normal mechanism and also to a Roth account (either IRA or 401K) via the backdoor and mega backdoor loopholes. You also nailed the two reasons why I use it, although of the two I consider the hedging aspect to be more important than tax efficiency. You don't have to look that far back in American history to see tax rates that were much different than they are today, so I think it is foolish to believe that I will be able to accurately predict where my future tax rate will be relative to my current one.
TheRagnCajun
Member
If you go Roth, you have paid your dues and you don't have to worry about it. If you have an IRA, you are merely guessing what the government policy will be on Income Tax brackets when you try to take it out. Its important to remember that tax brackets can change, and really if they are going to change it will likely be up.
Thanks, tokkun.
The big unknown is definitely future tax rates, and for retirement planning I do not try to guess them, but rather hedge for possible outcomes. (Roth/Traditional mix discussed above.)
What I do know is my income now is much higher than it will be in retirement. As long as a progressive tax rate is maintained in the future, my average income tax will be lower in retirement. Given my bias toward planning around known variables, I go with the traditional, since all things equal that is the one that will provide a known tax benefit. It would take a very large tax increase in the future to offset the potential tax savings.
If you plan to maintain your income level in retirement, then this calculus would not make sense.
Wait, the employer matching is not in a Roth account? Then that means they are matching my after tax amount, which means they are putting in less money than if I was using a traditional, no?
If you contribute the same amount to Roth or traditional, you will get the same company match. The difference is that it takes more pre-tax dollars to make an equal contribution to a Roth account. Companies will only match contributions up to some fixed amount. By law it can't be more than $18K (since that is the maximum most people are allowed to contribute), but it may be much less depending on your specific 401K plan. If you are going to hit that maximum, then it doesn't matter whether you do Roth or traditional. If you are not going to hit it, then you are probably better off doing traditional contributions since it will get you closer to the max. You need to look up your plan details to decide.
TangoAlphaLima
Member
Don't know. You'd have to look at your statements to figure it out. It's possible that they're doing a dollar for dollar match up to 5% or what have you, but they calculate their contribution based on pre-tax dollars, while your contribution is based on post-tax dollars. Obviously maxing out your employer's contribution is the best case scenario for you, so you definitely want to look into that.
After 401k and Roth, what is the suggested strategy for investing using post-tax money? My concern is with needing to pay taxes on distributions/dividends/etc.
I was surprised to see ~200$ in taxes for dividends/distributions and want to minimize this. I know it's post-tax and unsheltered, and I know I'm just paying taxes on new income- but I'm sure there are good strategies for this like avoiding securities with dividends/etc so I don't end up paying thousands in taxes annually years from now.
Backdoor roths a possibility?
I was surprised to see ~200$ in taxes for dividends/distributions and want to minimize this. I know it's post-tax and unsheltered, and I know I'm just paying taxes on new income- but I'm sure there are good strategies for this like avoiding securities with dividends/etc so I don't end up paying thousands in taxes annually years from now.
Backdoor roths a possibility?
Randolph Freelander
Member
One strategy is to be in funds with low turnover, which is to say follow the same basic advice we're giving for retirement accounts -- be in an index fund, not a managed fund. Managed funds with higher turnover produce more taxable events.
Something you can add to your pre-tax mix, if you haven't already, is an HSA.
You can use an investment option within such an account to get into the same type of funds that might be in a typical retirement account. This will allow you to reduce your current tax burden while setting aside money for health care needs and allowing it to grow. After you reach the age of 65, you can start withdrawing funds for non-health matters and pay ordinary income tax (just like pre-tax retirement accounts).
Walter White Walker
Member
Also use ETF's in a taxable account over funds - they're more tax efficient.
https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency
https://www.fidelity.com/learning-center/investment-products/etf/etfs-tax-efficiency
Are there studies / statistics to back this up? I am sceptical.