I’ve actually read it’s a good idea to go conservative in the years right before through the few years after retirement…and then start to add risk back in. So not a bad strategy I’m sure. When looking at early retirement, I could see the argument for staying aggressive if you were willing to risk it and build even bigger (again obviously if you were willing to stay working longer if the market went down). No real reason to be aggressive building wealth you won’t need though. Especially for you, as you have no need/desire to help kids in the future…
Retirement Targets
- Thread starter yowza
- Start date
This is correct advice for unmarried individuals, take it as soon as you can afford to. If you are married and believe your spouse will outlive you, you may want to consider delay until FRA, especially if your income was considerably higher than the spouse. Survivor benefits are capped at higher earner's benefit at FRA so no need to delay past FRA, but if you start SS early, not only are your benefits reduced, but subsequent survivor benefits are also.
I think that idea is to not go crazy and/or build a cushion. I have some outside “fun” stocks and some money in a money market. If you have those, it creates a fund that you can pull from if the market corrects.
You can also shift to higher dividend stocks. Like an ATT that pays in that 5-6% and usually holds inflation on price. I miss the 8% dividend though.
Clarify that as the higher FICA payer. Since I was told that SS wouldn’t be there and the returns suck; I do mostly unearned income for payments. I earn more than my wife, but she pays way more into FICA than I.
Length of time in the market doesn't matter at all. The only thing that matters is the tax rate at the start and at the end. If the marginal tax rate is the same on both ends, traditional vs Roth makes no difference. You could be in the market for a thousand years and it wouldn't matter. Actually, traditional would be slightly better because not all withdrawals are taxed at the marginal rate.
Somebody close to starting retirement today is probably unlikely to have their highest marginal tax rate. When I started my first job out of college in 1990 I had a 28% marginal rate. If I were still single today I'd have to be making over $200,000 to be higher than that and quite a bit more than that to have an effective rate higher than 28%. I'm married now so it would need to be over $400,000 to hit a marginal rate higher than 28%. If you add in state taxes, which Iowa no longer takes on IRA withdrawals, I'd have to be well north of $500,000 per year to reach the break even point.
Probably nothing wrong with filling out the 12% bracket with conversions, but in my opinion RMDs bigger than what you need are just a sign you won the game. There are millions of people who would gladly change places with somebody being "forced" to take out more money than they need.
Roth earnings are never taxed, period. No marginal tax up front, because the earnings are $0 at that point, and no tax at the end.
If the marginal tax rate is the same on both ends, then Roth vs Traditional doesn't matter for your contributed dollars. But earnings on those contributions will matter. With a traditional, they will be taxed as you pull them out. For a Roth, the earnings will never, ever be taxed.
Since earnings are based on time in the market, I stand by my assertion that time matters when choosing between the two.
H
I'm about 20 months away from retiring. I'll be 61 at that time and will have been in my current position for 31 years. It's time. A couple of comments:
1) I've maxed out my social security contribution for the year. Sure, I like the extra money for the rest of the year, but I shouldn't get to stop contributing when lower income workers have to pay a higher proportional rate than me. An easy fix for social security would be to remove the social security tax cap so that higher earners pay on their entire salary.
2) I know I'm going to struggle going from "savings" mode to "spending" mode. I have to keep reminding myself that I don't need to factor savings into my post-retirement budget, and that at that point it will be OK to see balances level off or decline (at a nominal rate) vs. contribute/grow.
1) I've maxed out my social security contribution for the year. Sure, I like the extra money for the rest of the year, but I shouldn't get to stop contributing when lower income workers have to pay a higher proportional rate than me. An easy fix for social security would be to remove the social security tax cap so that higher earners pay on their entire salary.
2) I know I'm going to struggle going from "savings" mode to "spending" mode. I have to keep reminding myself that I don't need to factor savings into my post-retirement budget, and that at that point it will be OK to see balances level off or decline (at a nominal rate) vs. contribute/grow.
The surviving spouse is entitled to 100% of the deceased’s benefit including delayed credits, if the spouse has reached his/her FRA. There are no additional delayed credits if the surviving spouse delays claiming beyond their own FRA.
"An easy fix for social security would be to remove the social security tax cap so that higher earners pay on their entire salary. "
I hear this a lot, and it makes sense, but I have some questions. Do you think the cap should also be raised on what is paid out? If people are putting in more, should the limit be raised above $4k? Also, should it be completely removed?
The Congressional Budget Office (CBO) estimates that eliminating the cap without increasing benefits for high earners could extend the trust fund’s solvency by about 5-10 years, pushing depletion past 2040. If benefits for high earners were also increased (proportional to contributions), the extension would be shorter, around 3-5 years.
In summary, a lot of things should happen to make SS solvent.
Increasing the payroll tax rate
Remove SS tax cap
Raising the age again
I would have no problem with my benefits being capped. I have had the means to alternatives to supplement ss income. I have distant family members whose only source of income is ss, and any reduction in benefits would be catastrophic.
Where did that starter Roth money come from? It is after tax earned income, right? To keep things simple lets say you have a 10% marginal rate. For traditional you can take 10 dollars and invest it without any initial taxes. For Roth you have to use after tax money so that $10 becomes $9 and you invest that. The $9 grows tax free and the $10 has 10% tax at the end, but the net result is exactly the same . You can continue to believe whatever you want but the absolute mathematical fact is time in the market doesn't matter.
One thing people often ignore in these discussions is state income tax policy. If you live in Iowa and you enroll in a tax deferred plan, you will not pay state income tax going in. A couple of years ago they eliminated state income tax on withdrawals in retirement. You escape state income tax completely. You can also do this if you live in a state that has an income tax while working and move to a tax free state in retirement. Not having to pay state income taxes on withdrawals may make the traditional plan worthwhile even if the federal rate is the same or higher in retirement.
This Roth vs. Traditional point is exactly right. I have both Roth and traditional, and I like different things about both, but the Roth sales pitch always ignores the fact that I have more pre-tax dollars than after tax dollars. Also, as your earlier comment noted, my pre-tax traditional deferral takes dollars off of my top marginal rate. When I pull those dollars back out, some will be taxed at zero, and others will be taxed at lower rates than my top marginal rate.
To be fair to the pro Roth argument, I've seen some illustrations showing large traditional balances with a lot of money to be pushed into high tax brackets when RMDs kick in. Most of my retirement money is in a traditional 401k, but I'm planning on taking steps when I am at or near retirement age to manage that issue.
Yeah this is true. We all assume that you'll be taking like $50k a year and paying 15% tops, but you can absolutely have problems with this if done wrong.
I have a good chunk in a trad rollover ira, as well as some other TOD stuff. I figured "take the IRA stuff first so you don't pay cap gains etc on the other stuff" but every planner I interviewed said do the opposite. Counterintuitive.
What's weird is they all say convert to Roth even if it costs a metric ton in tax now. Again, seems counterintuitive, I will have to do the math to understand it when the time comes.
These are great points.
I just ran some numbers for a few people I know who's RMDs are about to kick in, with $500k in rollover accounts and several other income streams. They ended up with a 10% effective tax rate on about $90k-$100k worth of income. I was pleasantly surprised and to the point above; they won and won't really have to worry too much about eating ramen in the future, because the RMDs aren't too bad until you hit 90-100 age group.
In my personal situation, I've got some deferred comp that will get me the first 5-years of retirement, but I'm debating on taking the hit on a traditional to roth conversion now at the worst tax rate I'll ever be in, or doing as you suggest and trying to strategically do it later, likely through a Roth ladder. It's been interesting to start playing the game now, because time is certainly flying.
I understand his point though. If you only made one contribution to your account (ignore past limits for the purpose of this) - contributing $5000 30 years ago could mean that $40k or $50k now. If you paid 25% on that $5,000 initially, that’s $1,250 you ever had to pay on $40-50k if it’s a Roth IRA. But if it was a traditional IRA, you saved that $1,250 back then, but even if you’re only in a 12% bracket when you take the money out, you’re still paying around $5k in taxes. Whereas if you make that contribution 5 years before retirement, perhaps you are looking at paying $1250 while working vs 12% on a modest $8k (less growth) when you pull the money…or a measly $960 if you are in a 12% bracket.
I understand it’s a little more complicated than that, but I understand his point.
It can be bad for a widow when they start paying tax on the RMD filing single instead of married filing jointly. Also in favor of the Roth is the effect of a large withdrawal. Say you want to remodel, buy a second home, RV, etc. having to take a large sum from a traditional all at once can create a large tax bill. I generally think people should have some of both traditional and Roth for the most flexibility.
This, 1000%.
Roth should be considered a "tax me now" account, whereas traditional IRA and 401k accounts are "tax me later". I'm talking about initial contributions, and you're making a bet that your personal tax rate will be higher down the road than at the time of the contribution (or conversion, for that matter).
Only the HSA is a "tax me never" account, as long as funds are used for qualified expenses.
And everyone socking money away into a Roth thinking the earnings will NEVER be taxed has a lot more faith in the federal government to not change their mind in the future than I do...
