Should I Stop Retirement Contributions? A behavioral finance dilemma

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fundmental
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Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by fundmental »

I have run a projection on my assets and living expenses in retirement, and I wonder if I should shift my “behavioral finance” paradigm and discontinue retirement savings. Am I missing some considerations here? Here are the details:

I am age 51 and my wife is 47. We plan to retire in 9 years when I am at age 60 when my two children finish college. My wife and I both have emphasized retirement savings over our other savings. My wife maximizes her employee 401k contributions. I own a small business (S corp), so I am able to make sizable employee and employer contributions. In 2021, I was able to add the “catch up” contribution to put away a total of $64,500 in my solo 401k, far more than I ever thought I would contribute in a year. One big reason I max out this contribution is for the tax benefit, and I have a hard time taking the tax hit on earnings.

By age 60, we will have over $3.8M in our retirement accounts assuming a 6% rate of return. That number also assumes we will only contribute 50% of what we have done in previous years. On the flip side, we will have only about $250K in taxable accounts after paying off our primary home mortgage around the retirement date. We will still continue to pay mortgage payments for 20 years on a beach home where we hope to retire for parts of the year. Given that I am planning on carrying that mortgage into retirement, I ran a projection on our living expenses for 25 years.
I assumed we would start with 3.8M savings in our tax deferred account. I listed all of our anticipated expenses, including extra for health care, and I applied an inflation rate of 3% over the 25-year projection. I also factored a 20% effective tax rate (married filing jointly). I used a 4% rate of return on the tax-deferred retirement accounts. And I used the 4% withdrawal rule with annual adjustments for inflation.
What I have found is that my 401k balance never gets below $3.5M after 25 years no matter how I tweak the variables. Based on that, I feel inclined to fund my taxable accounts for the next 9 years and deny myself the tax benefit of contributing to my solo 401k. I am not even factoring in the QBI deduction for my business, which is 20% of my qualified business pass-through income. That deduction would be even higher if did not contribute to the 401k.

So aside from the unknown disaster’s life can hand us, what am I missing in this projection? Maybe I should still make some 401k contributions – but I do regret not having more in my taxable accounts (which I could use over the next 5-10 years). :sharebeer :sharebeer
Zeno
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by Zeno »

fundmental wrote: Sat Jan 22, 2022 3:28 pm I have run a projection on my assets and living expenses in retirement, and I wonder if I should shift my “behavioral finance” paradigm and discontinue retirement savings. Am I missing some considerations here? Here are the details:

I am age 51 and my wife is 47. We plan to retire in 9 years when I am at age 60 when my two children finish college. My wife and I both have emphasized retirement savings over our other savings. My wife maximizes her employee 401k contributions. I own a small business (S corp), so I am able to make sizable employee and employer contributions. In 2021, I was able to add the “catch up” contribution to put away a total of $64,500 in my solo 401k, far more than I ever thought I would contribute in a year. One big reason I max out this contribution is for the tax benefit, and I have a hard time taking the tax hit on earnings.

By age 60, we will have over $3.8M in our retirement accounts assuming a 6% rate of return. That number also assumes we will only contribute 50% of what we have done in previous years. On the flip side, we will have only about $250K in taxable accounts after paying off our primary home mortgage around the retirement date. We will still continue to pay mortgage payments for 20 years on a beach home where we hope to retire for parts of the year. Given that I am planning on carrying that mortgage into retirement, I ran a projection on our living expenses for 25 years.
I assumed we would start with 3.8M savings in our tax deferred account. I listed all of our anticipated expenses, including extra for health care, and I applied an inflation rate of 3% over the 25-year projection. I also factored a 20% effective tax rate (married filing jointly). I used a 4% rate of return on the tax-deferred retirement accounts. And I used the 4% withdrawal rule with annual adjustments for inflation.
What I have found is that my 401k balance never gets below $3.5M after 25 years no matter how I tweak the variables. Based on that, I feel inclined to fund my taxable accounts for the next 9 years and deny myself the tax benefit of contributing to my solo 401k. I am not even factoring in the QBI deduction for my business, which is 20% of my qualified business pass-through income. That deduction would be even higher if did not contribute to the 401k.

So aside from the unknown disaster’s life can hand us, what am I missing in this projection? Maybe I should still make some 401k contributions – but I do regret not having more in my taxable accounts (which I could use over the next 5-10 years). :sharebeer :sharebeer
I hear where you are coming from.

That said, you haven't disclosed what you have now. You only state what you (may hopefully) have nine years from now, based on assumptions.

A humble suggestion you post a portfolio review per the forum's guidelines.
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arcticpineapplecorp.
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by arcticpineapplecorp. »

i won't comment on the plan (if you ran firecalc or some other assumptions, fine). the only thing i see beyond the assumption of 6% per year from now to retirement (could that be wrong?) is you're saying you want to contribute to taxable instead of tax advantaged because of a tax hit (assuming later?).

you also throw in the variable of a reduced QBI if you put money in tax deferred rather than taxable.

So the question I have is what is the amount of reduced QBI from contributing to tax deferred and lowering the income and thereby the QBI?

Because you have to look at what you stand to lose doing tax deferred and less QBI vs more taxable (less tax deferred) with higher QBI.

Methinks you might get a bigger tax break because of your tax bracket doing tax deferred and losing QBI than losing tax deferred space to get a biggler QBI.

Isn't QBI like 20%?

Isnt' your tax bracket higher than 20%?

If so, why wouldn't you want to take the tax deferral of your highest tax bracket?

Also another question is even if you don't want tax deferred because you want a bigger QBI, couldn't you do Roth 401k instead rather than putting the money in taxable?

as was suggested edit your post please according to my link below regarding "asking portfolio questions".
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PoppyA
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by PoppyA »

Have you calculated RMD’s? What tax bracket will you be in then? What about funding a Roth?
Affable at 50
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by Affable at 50 »

fundmental wrote: Sat Jan 22, 2022 3:28 pm I have run a projection on my assets and living expenses in retirement, and I wonder if I should shift my “behavioral finance” paradigm and discontinue retirement savings. Am I missing some considerations here? Here are the details:

I am age 51 and my wife is 47. We plan to retire in 9 years when I am at age 60 when my two children finish college. My wife and I both have emphasized retirement savings over our other savings. My wife maximizes her employee 401k contributions. I own a small business (S corp), so I am able to make sizable employee and employer contributions. In 2021, I was able to add the “catch up” contribution to put away a total of $64,500 in my solo 401k, far more than I ever thought I would contribute in a year. One big reason I max out this contribution is for the tax benefit, and I have a hard time taking the tax hit on earnings.

By age 60, we will have over $3.8M in our retirement accounts assuming a 6% rate of return. That number also assumes we will only contribute 50% of what we have done in previous years. On the flip side, we will have only about $250K in taxable accounts after paying off our primary home mortgage around the retirement date. We will still continue to pay mortgage payments for 20 years on a beach home where we hope to retire for parts of the year. Given that I am planning on carrying that mortgage into retirement, I ran a projection on our living expenses for 25 years.
I assumed we would start with 3.8M savings in our tax deferred account. I listed all of our anticipated expenses, including extra for health care, and I applied an inflation rate of 3% over the 25-year projection. I also factored a 20% effective tax rate (married filing jointly). I used a 4% rate of return on the tax-deferred retirement accounts. And I used the 4% withdrawal rule with annual adjustments for inflation.
What I have found is that my 401k balance never gets below $3.5M after 25 years no matter how I tweak the variables. Based on that, I feel inclined to fund my taxable accounts for the next 9 years and deny myself the tax benefit of contributing to my solo 401k. I am not even factoring in the QBI deduction for my business, which is 20% of my qualified business pass-through income. That deduction would be even higher if did not contribute to the 401k.

So aside from the unknown disaster’s life can hand us, what am I missing in this projection? Maybe I should still make some 401k contributions – but I do regret not having more in my taxable accounts (which I could use over the next 5-10 years). :sharebeer :sharebeer
Congratulations on your success. I am not sure why you posted here since your post did not contain a question. There’s nothing actionable here.
randomguy
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by randomguy »

You would need to figure out your tax rates in the future versus now. If I had to guess the TDA til 60 makes sense. I am guessing you are in the place where you are paying 22%/24% now and at worst will be paying similiar rates later and likely much lower if you are retired. And if you ever want to spend your taxable account you pay an additional 15% on the gains unless one of you dies.

If you decide you don't want the tax savings now, look into doing a Roth 401(k). You can't stick employer contributions in there but if you are both shoving in the max, you are going to move a lot of money out of that TDA.
retire2022
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by retire2022 »

fundmental wrote: Sat Jan 22, 2022 3:28 pm I have run a projection on my assets and living expenses in retirement, and I wonder if I should shift my “behavioral finance” paradigm and discontinue retirement savings. Am I missing some considerations here? Here are the details:

I am age 51 and my wife is 47. We plan to retire in 9 years when I am at age 60 when my two children finish college. My wife and I both have emphasized retirement savings over our other savings. My wife maximizes her employee 401k contributions. I own a small business (S corp), so I am able to make sizable employee and employer contributions. In 2021, I was able to add the “catch up” contribution to put away a total of $64,500 in my solo 401k, far more than I ever thought I would contribute in a year. One big reason I max out this contribution is for the tax benefit, and I have a hard time taking the tax hit on earnings.

By age 60, we will have over $3.8M in our retirement accounts assuming a 6% rate of return. That number also assumes we will only contribute 50% of what we have done in previous years. On the flip side, we will have only about $250K in taxable accounts after paying off our primary home mortgage around the retirement date. We will still continue to pay mortgage payments for 20 years on a beach home where we hope to retire for parts of the year. Given that I am planning on carrying that mortgage into retirement, I ran a projection on our living expenses for 25 years.
I assumed we would start with 3.8M savings in our tax deferred account. I listed all of our anticipated expenses, including extra for health care, and I applied an inflation rate of 3% over the 25-year projection. I also factored a 20% effective tax rate (married filing jointly). I used a 4% rate of return on the tax-deferred retirement accounts. And I used the 4% withdrawal rule with annual adjustments for inflation.
What I have found is that my 401k balance never gets below $3.5M after 25 years no matter how I tweak the variables. Based on that, I feel inclined to fund my taxable accounts for the next 9 years and deny myself the tax benefit of contributing to my solo 401k. I am not even factoring in the QBI deduction for my business, which is 20% of my qualified business pass-through income. That deduction would be even higher if did not contribute to the 401k.

So aside from the unknown disaster’s life can hand us, what am I missing in this projection? Maybe I should still make some 401k contributions – but I do regret not having more in my taxable accounts (which I could use over the next 5-10 years). :sharebeer :sharebeer
Please use pencil icon above right and edit your original posting as per "asking questions template" which is missing in your original post: viewtopic.php?f=1&t=6212

Once when edited, better actionable responses should be forthcoming thanks
chipperd
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by chipperd »

fundmental wrote: Sat Jan 22, 2022 3:28 pm I have run a projection on my assets and living expenses in retirement, and I wonder if I should shift my “behavioral finance” paradigm and discontinue retirement savings. Am I missing some considerations here? Here are the details:

I am age 51 and my wife is 47. We plan to retire in 9 years when I am at age 60 when my two children finish college. My wife and I both have emphasized retirement savings over our other savings. My wife maximizes her employee 401k contributions. I own a small business (S corp), so I am able to make sizable employee and employer contributions. In 2021, I was able to add the “catch up” contribution to put away a total of $64,500 in my solo 401k, far more than I ever thought I would contribute in a year. One big reason I max out this contribution is for the tax benefit, and I have a hard time taking the tax hit on earnings.

By age 60, we will have over $3.8M in our retirement accounts assuming a 6% rate of return. That number also assumes we will only contribute 50% of what we have done in previous years. On the flip side, we will have only about $250K in taxable accounts after paying off our primary home mortgage around the retirement date. We will still continue to pay mortgage payments for 20 years on a beach home where we hope to retire for parts of the year. Given that I am planning on carrying that mortgage into retirement, I ran a projection on our living expenses for 25 years.
I assumed we would start with 3.8M savings in our tax deferred account. I listed all of our anticipated expenses, including extra for health care, and I applied an inflation rate of 3% over the 25-year projection. I also factored a 20% effective tax rate (married filing jointly). I used a 4% rate of return on the tax-deferred retirement accounts. And I used the 4% withdrawal rule with annual adjustments for inflation.
What I have found is that my 401k balance never gets below $3.5M after 25 years no matter how I tweak the variables. Based on that, I feel inclined to fund my taxable accounts for the next 9 years and deny myself the tax benefit of contributing to my solo 401k. I am not even factoring in the QBI deduction for my business, which is 20% of my qualified business pass-through income. That deduction would be even higher if did not contribute to the 401k.

So aside from the unknown disaster’s life can hand us, what am I missing in this projection? Maybe I should still make some 401k contributions – but I do regret not having more in my taxable accounts (which I could use over the next 5-10 years). :sharebeer :sharebeer
So as far as what you may be missing in your projection, I'm thinking 6% real is quite aggressive in terms of anticipated returns. I use 1% real returns in my projections, but I'm conservative, so maybe somewhere in between?
Either way, if you've run the numbers and are comfortable, I would vote you save in taxable to have something to carry you from retirement to social security.
I'm not sure if that's what you are looking for in terms of responses, but those are my initial thoughts upon reading your post.
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Admiral
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by Admiral »

Perhaps I missed it, but why would you prefer saving in taxable to Roth? Is this an issue of phaseouts? Can you backdoor? Is there an employer plan?

There's nothing wrong with having money in all three account types, particularly since you plan to stop work at age 60. Don't forget you can always convert to Roth from pre-tax.

We have a large pension and have saved in all three accounts. However I would never save in taxable before Roth is maxed out, that doesn't make a lot of sense. You can always take out Roth contributions without penalty, so it's effectively the same as taxable, but with no tax drag.

I suggest you try Flexible Retirement Planner, and vary your return assumptions and the type of retirement accounts your contributing to, and see what it spits out.
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by 02nz »

A 6% return assumption is very optimistic. For one, you should use real, inflation-adjusted returns, not nominal returns, since tax brackets are indexed for inflation. And you're unlikely to capture the full market returns, since your portfolio should become more conservative (more bonds) as you approach retirement. Try running your calculations assuming 2-3% real returns.
chipperd wrote: Sat Jan 22, 2022 4:12 pm Either way, if you've run the numbers and are comfortable, I would vote you save in taxable to have something to carry you from retirement to social security.
OP didn't really state why they're considering funding taxable in preference to tax-advantaged accounts, but for anyone retiring at 60, bridging retirement and start of SS benefits is not a particularly good reason. For that tax-deferred is much better. Past age 59.5 they'll be able to withdraw from tax-advantaged accounts without penalty, and the years between retirement and social security are the perfect time to draw down tax-deferred accounts at very low tax rates. Currently, a MFJ couple with no other income can withdraw (or do Roth conversions) on over $100K every year and pay an average of just 9% federal income tax.
Last edited by 02nz on Sat Jan 22, 2022 4:28 pm, edited 1 time in total.
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by vineviz »

fundmental wrote: Sat Jan 22, 2022 3:28 pm So aside from the unknown disaster’s life can hand us, what am I missing in this projection? Maybe I should still make some 401k contributions – but I do regret not having more in my taxable accounts (which I could use over the next 5-10 years). :sharebeer :sharebeer
Unless your retirement portfolio is 100% stocks, your 6% return assumption might be optimistic. And if you retire at age 60 your portfolio has to last 35-40 years, not 25.

Other than that, as some have pointed out, the big unknown is the year-by-year breakdown of your marginal tax rate. I gather it is probably high now, but it's important to know what it is likely to be between retirement and the time you claim Social Security (presumably age 70) as well as afterwards.

If the ability to convert tax-deferred IRAs into Roth IRAs doesn't go away, you might have up to a decade to bring down the tax-deferred account balances which gives you a lot of optionality.

On the other hand if that conversion opportunity disappears you could very easily end up in a high bracket after age 72 when Social Security + RMDs can add up to a surprisingly high income. I see this with high-saving clients often: marginal tax rates in retirement sometimes equal or exceed the rates they are paying in their 50s and early 60s. You haven't given us quite enough information to know if you're in that particular hole, but if you are then the best first action is to stop digging.

Another thing you didn't mention is whether you are considering paying off the mortgages early. If the interest rates on them are over 2.5% I'd certainly think hard about wiping that debt out.
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02nz
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by 02nz »

fundmental wrote: Sat Jan 22, 2022 3:28 pm I do regret not having more in my taxable accounts (which I could use over the next 5-10 years).
What would you be doing with the money if you had more in taxable accounts?
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by chipperd »

02nz wrote: Sat Jan 22, 2022 4:28 pm A 6% return assumption is very optimistic. For one, you should use real, inflation-adjusted returns, not nominal returns, since tax brackets are indexed for inflation. And you're unlikely to capture the full market returns, since your portfolio should become more conservative (more bonds) as you approach retirement. Try running your calculations assuming 2-3% real returns.
chipperd wrote: Sat Jan 22, 2022 4:12 pm Either way, if you've run the numbers and are comfortable, I would vote you save in taxable to have something to carry you from retirement to social security.
OP didn't really state why they're considering funding taxable in preference to tax-advantaged accounts, but for anyone retiring at 60, bridging retirement and start of SS benefits is not a particularly good reason. For that tax-deferred is much better. Past age 59.5 they'll be able to withdraw from tax-advantaged accounts without penalty, and the years between retirement and social security are the perfect time to draw down tax-deferred accounts at very low tax rates. Currently, a MFJ couple with no other income can withdraw (or do Roth conversions) on over $100K every year and pay an average of just 9% federal income tax.
I was considering the fact that OP only has $250k in taxable after paying of primary mortgage and will still have mortgage on second home. Not sure what living expenses are but I'd be willing to bet $250k won't carry OP and family through to social security.
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02nz
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by 02nz »

chipperd wrote: Sat Jan 22, 2022 5:58 pm
02nz wrote: Sat Jan 22, 2022 4:28 pm A 6% return assumption is very optimistic. For one, you should use real, inflation-adjusted returns, not nominal returns, since tax brackets are indexed for inflation. And you're unlikely to capture the full market returns, since your portfolio should become more conservative (more bonds) as you approach retirement. Try running your calculations assuming 2-3% real returns.
chipperd wrote: Sat Jan 22, 2022 4:12 pm Either way, if you've run the numbers and are comfortable, I would vote you save in taxable to have something to carry you from retirement to social security.
OP didn't really state why they're considering funding taxable in preference to tax-advantaged accounts, but for anyone retiring at 60, bridging retirement and start of SS benefits is not a particularly good reason. For that tax-deferred is much better. Past age 59.5 they'll be able to withdraw from tax-advantaged accounts without penalty, and the years between retirement and social security are the perfect time to draw down tax-deferred accounts at very low tax rates. Currently, a MFJ couple with no other income can withdraw (or do Roth conversions) on over $100K every year and pay an average of just 9% federal income tax.
I was considering the fact that OP only has $250k in taxable after paying of primary mortgage and will still have mortgage on second home. Not sure what living expenses are but I'd be willing to bet $250k won't carry OP and family through to social security.
Why does OP need even a dime in taxable to carry through to Social Security? Between retiring and 60 and starting SS at say 70 is the perfect time to withdraw from tax-deferred accounts. What does a taxable account offer in advantages for OP, vs tax-deferred or Roth accounts?

Having a taxable account is much more important if planning to retire before age 59.5, since tax-advantaged accounts cannot be accessed without penalty before that age (but even then there are LOTS of workarounds).
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by canadianbacon »

Although equities have higher expected returns over time, their returns over shorter periods are more volatile. The worst 9-year return we have had is -4.86% per year (http://www.lazyportfolioetf.com/allocat ... g-returns/). Are you going to be able to retire when you intend to if you get -4% instead of +6%?

(This data series actually only goes back to 1972 so worse is potentially possible, but the same point applies).
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Admiral
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by Admiral »

02nz wrote: Sat Jan 22, 2022 6:02 pm
chipperd wrote: Sat Jan 22, 2022 5:58 pm
02nz wrote: Sat Jan 22, 2022 4:28 pm A 6% return assumption is very optimistic. For one, you should use real, inflation-adjusted returns, not nominal returns, since tax brackets are indexed for inflation. And you're unlikely to capture the full market returns, since your portfolio should become more conservative (more bonds) as you approach retirement. Try running your calculations assuming 2-3% real returns.
chipperd wrote: Sat Jan 22, 2022 4:12 pm Either way, if you've run the numbers and are comfortable, I would vote you save in taxable to have something to carry you from retirement to social security.
OP didn't really state why they're considering funding taxable in preference to tax-advantaged accounts, but for anyone retiring at 60, bridging retirement and start of SS benefits is not a particularly good reason. For that tax-deferred is much better. Past age 59.5 they'll be able to withdraw from tax-advantaged accounts without penalty, and the years between retirement and social security are the perfect time to draw down tax-deferred accounts at very low tax rates. Currently, a MFJ couple with no other income can withdraw (or do Roth conversions) on over $100K every year and pay an average of just 9% federal income tax.
I was considering the fact that OP only has $250k in taxable after paying of primary mortgage and will still have mortgage on second home. Not sure what living expenses are but I'd be willing to bet $250k won't carry OP and family through to social security.
Why does OP need even a dime in taxable to carry through to Social Security? Between retiring and 60 and starting SS at say 70 is the perfect time to withdraw from tax-deferred accounts. What does a taxable account offer in advantages for OP, vs tax-deferred or Roth accounts?

Having a taxable account is much more important if planning to retire before age 59.5, since tax-advantaged accounts cannot be accessed without penalty before that age (but even then there are LOTS of workarounds).
Well one thing it COULD do would be to provide more space for conversions. Live off taxable, convert a lot over 10 years. Whether it makes sense from a tax perspective depends on what they’d pay now to get that in taxable versus the tax savings later.
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by chipperd »

02nz wrote: Sat Jan 22, 2022 6:02 pm
chipperd wrote: Sat Jan 22, 2022 5:58 pm
02nz wrote: Sat Jan 22, 2022 4:28 pm A 6% return assumption is very optimistic. For one, you should use real, inflation-adjusted returns, not nominal returns, since tax brackets are indexed for inflation. And you're unlikely to capture the full market returns, since your portfolio should become more conservative (more bonds) as you approach retirement. Try running your calculations assuming 2-3% real returns.
chipperd wrote: Sat Jan 22, 2022 4:12 pm Either way, if you've run the numbers and are comfortable, I would vote you save in taxable to have something to carry you from retirement to social security.
OP didn't really state why they're considering funding taxable in preference to tax-advantaged accounts, but for anyone retiring at 60, bridging retirement and start of SS benefits is not a particularly good reason. For that tax-deferred is much better. Past age 59.5 they'll be able to withdraw from tax-advantaged accounts without penalty, and the years between retirement and social security are the perfect time to draw down tax-deferred accounts at very low tax rates. Currently, a MFJ couple with no other income can withdraw (or do Roth conversions) on over $100K every year and pay an average of just 9% federal income tax.
I was considering the fact that OP only has $250k in taxable after paying of primary mortgage and will still have mortgage on second home. Not sure what living expenses are but I'd be willing to bet $250k won't carry OP and family through to social security.
Why does OP need even a dime in taxable to carry through to Social Security? Between retiring and 60 and starting SS at say 70 is the perfect time to withdraw from tax-deferred accounts. What does a taxable account offer in advantages for OP, vs tax-deferred or Roth accounts?

Having a taxable account is much more important if planning to retire before age 59.5, since tax-advantaged accounts cannot be accessed without penalty before that age (but even then there are LOTS of workarounds).
B/C OP could retire before 59.5. We don't know. Expenses aren't stated. Just reverse engineering into the fact that OP is even considering taxable savings, which is to your point.
If OP is truly going to retire at 60, why even post as he did?
I guess that's really a question for the OP.
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BernardShakey
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by BernardShakey »

vineviz wrote: Sat Jan 22, 2022 4:28 pm If the interest rates on them are over 2.5% I'd certainly think hard about wiping that debt out.
Why do you think an interest rate of 2.5% is the threshold for whether or not to pay down a mortgage ?
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by Fat Tails »

You still need to keep saving, the question is where to put the savings: in tax deferred, Roth, or taxable. If you are in a high tax bracket 22% or higher, then tax deferred is likely best. Lower tax bracket, then Roth is likely best. You could use a bit more in taxable, so why don’t you shift some (but not all) savings into taxable.

Lastly, a 6% return projection is too high. Also, 4% withdrawal is likely too high as well. You may want to change your projections to 4%/3% and see how that changes things.

Cheers.
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Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by vineviz »

BernardShakey wrote: Sat Jan 22, 2022 10:53 pm
vineviz wrote: Sat Jan 22, 2022 4:28 pm If the interest rates on them are over 2.5% I'd certainly think hard about wiping that debt out.
Why do you think an interest rate of 2.5% is the threshold for whether or not to pay down a mortgage ?
That's about 100bps above the risk-free rate for mortgages, which should exceed the combined value of any possible tax advantages for deduction (if that's possible for the OP) plus a typical liquidity premium for most investors. It's just a ballpark number, of course, and the OP could clearly make a more precise estimate with just a little work.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Topic Author
fundmental
Posts: 7
Joined: Thu Nov 22, 2018 10:52 am

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by fundmental »

Thanks to those who responded. I apologize for my delay in replying to this, and for not clarifying my question further. I have more portfolio details below. The question boils down to whether foregoing further 401k contributions will still sustain my retirement projection of $3M+ over 25-30 years. I plan to retire in 9 years at age 60. With expected returns (from now til then) of 6%, 3% ongoing inflation, and our investment contribution plan I project around 3.8M in our tax deferred accounts when we retire. As I state in my OP, I don't see our expenses depleting the fund below $3M even if I carry a mortgage. I don't mind leaving my kids an inheritance, but if I save to taxable accounts (not a Roth) from now on, is my projection still valid?

My question is more concerned with lack of taxable savings I have. I have around $250k now, and a good portion of it is the mortgage paydown fund I plan to use pay off our primary mortgage in 7 years. The "mortgage side fund" has been a discipline that has truly paid off. The rest of our savings contains 6+ months of contingency (emergency) funds and some brokerage account muni bond funds.

Here is why I think more now about saving in my taxable: While my wife and I have been good savers (not super savers), we would like to spend more in the next 5-10 years (before retirement). Travel before the kids move on is a goal (something we have not done much of for a decade+) and we may be able to purchase the other side of our beach front condo. If I were to forego further solo 401k contributions I could greatly increase my taxable savings within 5 years which would help. Our beach property is a consumption item (our choice in lieu of travel), but it has rocketed in value from $850k to $2M in 7 years. Purchasing the other side of the condo would let us rent it for a while and possibly renovate the entire home into a single unit for retirement. Purchasing the other side of our beach condo is unlikely given real estate prices, but you know, goals have to start with a vision.

Current portfolio summary:
Savings
Tax deferred: $1.92M 60% Total Stock Market, 15% Total Intl Stock, 15% bonds, 5% REIT fund, 5% Small Cap Value
Taxable: $90k mortgage paydown fund, $100k emergency fund (cash and PA tax free muni bond fund), $20k I-bonds, $40k brokerage (stocks)
College savings (2 children): $270k (college in 5 years for both)

Debt
Primary mortgage: $373k 2.375% APR ("Zillow value": 765k; 51% equity); to be paid off in 7 years or less with mortgage paydown fund
Vacation home mortgage: $556k 3% APR ("Zillow value" $1.95M, 72% equity)
No car or credit debt
Admiral
Posts: 5039
Joined: Mon Oct 27, 2014 12:35 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by Admiral »

fundmental wrote: Wed Jan 26, 2022 9:18 am Thanks to those who responded. I apologize for my delay in replying to this, and for not clarifying my question further. I have more portfolio details below. The question boils down to whether foregoing further 401k contributions will still sustain my retirement projection of $3M+ over 25-30 years. I plan to retire in 9 years at age 60. With expected returns (from now til then) of 6%, 3% ongoing inflation, and our investment contribution plan I project around 3.8M in our tax deferred accounts when we retire. As I state in my OP, I don't see our expenses depleting the fund below $3M even if I carry a mortgage. I don't mind leaving my kids an inheritance, but if I save to taxable accounts (not a Roth) from now on, is my projection still valid?

My question is more concerned with lack of taxable savings I have. I have around $250k now, and a good portion of it is the mortgage paydown fund I plan to use pay off our primary mortgage in 7 years. The "mortgage side fund" has been a discipline that has truly paid off. The rest of our savings contains 6+ months of contingency (emergency) funds and some brokerage account muni bond funds.

Here is why I think more now about saving in my taxable: While my wife and I have been good savers (not super savers), we would like to spend more in the next 5-10 years (before retirement). Travel before the kids move on is a goal (something we have not done much of for a decade+) and we may be able to purchase the other side of our beach front condo. If I were to forego further solo 401k contributions I could greatly increase my taxable savings within 5 years which would help. Our beach property is a consumption item (our choice in lieu of travel), but it has rocketed in value from $850k to $2M in 7 years. Purchasing the other side of the condo would let us rent it for a while and possibly renovate the entire home into a single unit for retirement. Purchasing the other side of our beach condo is unlikely given real estate prices, but you know, goals have to start with a vision.

Current portfolio summary:
Savings
Tax deferred: $1.92M 60% Total Stock Market, 15% Total Intl Stock, 15% bonds, 5% REIT fund, 5% Small Cap Value
Taxable: $90k mortgage paydown fund, $100k emergency fund (cash and PA tax free muni bond fund), $20k I-bonds, $40k brokerage (stocks)
College savings (2 children): $270k (college in 5 years for both)

Debt
Primary mortgage: $373k 2.375% APR ("Zillow value": 765k; 51% equity); to be paid off in 7 years or less with mortgage paydown fund
Vacation home mortgage: $556k 3% APR ("Zillow value" $1.95M, 72% equity)
No car or credit debt
I don't see that any of this has any bearing on where you save now. You could just as easily spend everything you ALREADY have in taxable and pay off the mortgage in seven years from Roth (or even from pre-tax, as you will be 60 and there's no penalty). You could even keep the mortgages--I certainly would not be forgoing a 20+% tax deductible contribution to a retirement plan so I could hurry up and pay a 2.375% mortgage. That makes no sense.

Spend down the taxable account if you need to, max all retirement space (including Roth) and worry about the other stuff later.

I see no Roth accounts so I would start there.

And, again, re-run your calculations with lower RoRs.
Topic Author
fundmental
Posts: 7
Joined: Thu Nov 22, 2018 10:52 am

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by fundmental »

Admiral wrote: Wed Jan 26, 2022 9:47 am
fundmental wrote: Wed Jan 26, 2022 9:18 am Thanks to those who responded. I apologize for my delay in replying to this, and for not clarifying my question further. I have more portfolio details below. The question boils down to whether foregoing further 401k contributions will still sustain my retirement projection of $3M+ over 25-30 years. I plan to retire in 9 years at age 60. With expected returns (from now til then) of 6%, 3% ongoing inflation, and our investment contribution plan I project around 3.8M in our tax deferred accounts when we retire. As I state in my OP, I don't see our expenses depleting the fund below $3M even if I carry a mortgage. I don't mind leaving my kids an inheritance, but if I save to taxable accounts (not a Roth) from now on, is my projection still valid?

My question is more concerned with lack of taxable savings I have. I have around $250k now, and a good portion of it is the mortgage paydown fund I plan to use pay off our primary mortgage in 7 years. The "mortgage side fund" has been a discipline that has truly paid off. The rest of our savings contains 6+ months of contingency (emergency) funds and some brokerage account muni bond funds.

Here is why I think more now about saving in my taxable: While my wife and I have been good savers (not super savers), we would like to spend more in the next 5-10 years (before retirement). Travel before the kids move on is a goal (something we have not done much of for a decade+) and we may be able to purchase the other side of our beach front condo. If I were to forego further solo 401k contributions I could greatly increase my taxable savings within 5 years which would help. Our beach property is a consumption item (our choice in lieu of travel), but it has rocketed in value from $850k to $2M in 7 years. Purchasing the other side of the condo would let us rent it for a while and possibly renovate the entire home into a single unit for retirement. Purchasing the other side of our beach condo is unlikely given real estate prices, but you know, goals have to start with a vision.

Current portfolio summary:
Savings
Tax deferred: $1.92M 60% Total Stock Market, 15% Total Intl Stock, 15% bonds, 5% REIT fund, 5% Small Cap Value
Taxable: $90k mortgage paydown fund, $100k emergency fund (cash and PA tax free muni bond fund), $20k I-bonds, $40k brokerage (stocks)
College savings (2 children): $270k (college in 5 years for both)

Debt
Primary mortgage: $373k 2.375% APR ("Zillow value": 765k; 51% equity); to be paid off in 7 years or less with mortgage paydown fund
Vacation home mortgage: $556k 3% APR ("Zillow value" $1.95M, 72% equity)
No car or credit debt
I don't see that any of this has any bearing on where you save now. You could just as easily spend everything you ALREADY have in taxable and pay off the mortgage in seven years from Roth (or even from pre-tax, as you will be 60 and there's no penalty). You could even keep the mortgages--I certainly would not be forgoing a 20+% tax deductible contribution to a retirement plan so I could hurry up and pay a 2.375% mortgage. That makes no sense.

Spend down the taxable account if you need to, max all retirement space (including Roth) and worry about the other stuff later.

I see no Roth accounts so I would start there.

And, again, re-run your calculations with lower RoRs.
Thanks for the reply. I almost agree that it doesn't matter much where I save given the time horizon (9 years until I reach 60). But if I were to take 50K of my 60K+ 401k contribution and instead put that 50K into taxable savings each year, in 4 years I would have an additional $200k I could use at age 55 if for example I want to acquire the other condo unit (which would be time-sensitive), etc. I agree it's crazy to pass up the tax deduction (that's been my behavioral finance belief for years), but when I run my projection I don't see that a crazy move like that would throw off my goal of $3M+ in retirement savings. Furthermore, I don't see the 401k balance declining much over 30 years with the withdrawl rates (3-5%), inflation (3%) and rates of return I tested (1-4%, no social security).

And how would you recommend that I adjust my rates of return? Right now I have them as 6% RoR from now until age 60; 4% after age 60.
Admiral
Posts: 5039
Joined: Mon Oct 27, 2014 12:35 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by Admiral »

fundmental wrote: Wed Jan 26, 2022 10:18 am
Admiral wrote: Wed Jan 26, 2022 9:47 am
fundmental wrote: Wed Jan 26, 2022 9:18 am Thanks to those who responded. I apologize for my delay in replying to this, and for not clarifying my question further. I have more portfolio details below. The question boils down to whether foregoing further 401k contributions will still sustain my retirement projection of $3M+ over 25-30 years. I plan to retire in 9 years at age 60. With expected returns (from now til then) of 6%, 3% ongoing inflation, and our investment contribution plan I project around 3.8M in our tax deferred accounts when we retire. As I state in my OP, I don't see our expenses depleting the fund below $3M even if I carry a mortgage. I don't mind leaving my kids an inheritance, but if I save to taxable accounts (not a Roth) from now on, is my projection still valid?

My question is more concerned with lack of taxable savings I have. I have around $250k now, and a good portion of it is the mortgage paydown fund I plan to use pay off our primary mortgage in 7 years. The "mortgage side fund" has been a discipline that has truly paid off. The rest of our savings contains 6+ months of contingency (emergency) funds and some brokerage account muni bond funds.

Here is why I think more now about saving in my taxable: While my wife and I have been good savers (not super savers), we would like to spend more in the next 5-10 years (before retirement). Travel before the kids move on is a goal (something we have not done much of for a decade+) and we may be able to purchase the other side of our beach front condo. If I were to forego further solo 401k contributions I could greatly increase my taxable savings within 5 years which would help. Our beach property is a consumption item (our choice in lieu of travel), but it has rocketed in value from $850k to $2M in 7 years. Purchasing the other side of the condo would let us rent it for a while and possibly renovate the entire home into a single unit for retirement. Purchasing the other side of our beach condo is unlikely given real estate prices, but you know, goals have to start with a vision.

Current portfolio summary:
Savings
Tax deferred: $1.92M 60% Total Stock Market, 15% Total Intl Stock, 15% bonds, 5% REIT fund, 5% Small Cap Value
Taxable: $90k mortgage paydown fund, $100k emergency fund (cash and PA tax free muni bond fund), $20k I-bonds, $40k brokerage (stocks)
College savings (2 children): $270k (college in 5 years for both)

Debt
Primary mortgage: $373k 2.375% APR ("Zillow value": 765k; 51% equity); to be paid off in 7 years or less with mortgage paydown fund
Vacation home mortgage: $556k 3% APR ("Zillow value" $1.95M, 72% equity)
No car or credit debt
I don't see that any of this has any bearing on where you save now. You could just as easily spend everything you ALREADY have in taxable and pay off the mortgage in seven years from Roth (or even from pre-tax, as you will be 60 and there's no penalty). You could even keep the mortgages--I certainly would not be forgoing a 20+% tax deductible contribution to a retirement plan so I could hurry up and pay a 2.375% mortgage. That makes no sense.

Spend down the taxable account if you need to, max all retirement space (including Roth) and worry about the other stuff later.

I see no Roth accounts so I would start there.

And, again, re-run your calculations with lower RoRs.
Thanks for the reply. I almost agree that it doesn't matter much where I save given the time horizon (9 years until I reach 60). But if I were to take 50K of my 60K+ 401k contribution and instead put that 50K into taxable savings each year, in 4 years I would have an additional $200k I could use at age 55 if for example I want to acquire the other condo unit (which would be time-sensitive), etc. I agree it's crazy to pass up the tax deduction (that's been my behavioral finance belief for years), but when I run my projection I don't see that a crazy move like that would throw off my goal of $3M+ in retirement savings. Furthermore, I don't see the 401k balance declining much over 30 years with the withdrawl rates (3-5%), inflation (3%) and rates of return I tested (1-4%, no social security).

And how would you recommend that I adjust my rates of return? Right now I have them as 6% RoR from now until age 60; 4% after age 60.
What is your current balance and what are your projected retirement expenses? What is your marginal tax rate now? What will it be at age 60?

Even if you took the money out early and paid a 10% penalty (which could be avoided, SEPP etc), if you're 25% marginal now you'd save 25% in taxes and then pay 10% in penalty to access the money, plus whatever your marginal rate is. Obviously if you're still working this is not the best plan. But if you're retired it might work to your advantage. But I still don't see why you don't just save the money in Roth. Sounds like you have a workplace plan so you could shift it all to Roth. Pay the tax now and you're done. $400k in taxable sounds like a lot of tax drag, plus capital gains.

As I noted upthread try a MC simulator for a range of returns. 2%-3% real (not nominal) would be fairly conservative in my view.

5% real with 3% inflation means 8% nominal returns on average. I'm not sure I would count on that. If I was, I would make sure I had plenty of fat I could trim.
inbox788
Posts: 8372
Joined: Thu Mar 15, 2012 5:24 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by inbox788 »

fundmental wrote: Wed Jan 26, 2022 10:18 amThanks for the reply. I almost agree that it doesn't matter much where I save given the time horizon (9 years until I reach 60). But if I were to take 50K of my 60K+ 401k contribution and instead put that 50K into taxable savings each year, in 4 years I would have an additional $200k I could use at age 55 if for example I want to acquire the other condo unit (which would be time-sensitive), etc. I agree it's crazy to pass up the tax deduction (that's been my behavioral finance belief for years), but when I run my projection I don't see that a crazy move like that would throw off my goal of $3M+ in retirement savings. Furthermore, I don't see the 401k balance declining much over 30 years with the withdrawl rates (3-5%), inflation (3%) and rates of return I tested (1-4%, no social security).

And how would you recommend that I adjust my rates of return? Right now I have them as 6% RoR from now until age 60; 4% after age 60.
But it does matter where you put it, and I think that's all that matters if no balance goes to zero. Are you afraid the taxable balance will reach zero before you're 60 and retire? What would it take for that to happen and where would you get additional funds?

If you're choosing between taxable and tax deferred at a high tax rate, it's pretty much tax deferred, since you can most likely take out later at same or lower tax rate, unless you're planning in a certain tax rate hike.

Now if it's between Roth and tax deferred, that's a different calculus. How much unused Roth do you have? How much unused tax advantaged? Will you have to give up tax deferred to max out Roth? The easy answer is to max out all tax advantaged accounts.

If you plan to and want to pay $200k cash for a condo, then you'll have to come up with the funds from accessible accounts, and it's a good idea to stock up on some cash, but if it's only an idea that might not come to fruition, you could simply get a loan down the road, and pay it off once retirement funds are accessible. I'd say the potential tax savings outweigh the potential costs and risks, but that depends on your particulars. I wouldn't be in a hurry to pay off low interest mortgages.
User avatar
BrooklynInvest
Posts: 1183
Joined: Sun Jul 28, 2013 9:23 am

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by BrooklynInvest »

02nz wrote: Sat Jan 22, 2022 6:02 pm

Why does OP need even a dime in taxable to carry through to Social Security? Between retiring and 60 and starting SS at say 70 is the perfect time to withdraw from tax-deferred accounts. What does a taxable account offer in advantages for OP, vs tax-deferred or Roth accounts?

Yeah, I couldn't figure this one out. I NEED my taxable to last me from 55 to 59 1/2 when I hit my 401k.
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by aristotelian »

Unless I missed it, we still need to know:

-Current marginal tax bracket
-Annual spending in retirement
-Current annual savings contributions

It is unusual to see such a high 401k balance with relatively few dollars in taxable and no Roth. I can see why you would be concerned about tax on distributions but it is still impossible to say without knowing your current marginal tax rate and how much you will need to withdraw annually.

What is "mortgage payoff fund"? If that is in risk assets, with a fairly short time frame you are taking a big risk by not paying down the mortgage now. If that is in cash or bonds, you would be better off paying down the mortgage immediately.
02nz
Posts: 10508
Joined: Wed Feb 21, 2018 2:17 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by 02nz »

BrooklynInvest wrote: Wed Jan 26, 2022 1:09 pm
02nz wrote: Sat Jan 22, 2022 6:02 pm

Why does OP need even a dime in taxable to carry through to Social Security? Between retiring and 60 and starting SS at say 70 is the perfect time to withdraw from tax-deferred accounts. What does a taxable account offer in advantages for OP, vs tax-deferred or Roth accounts?

Yeah, I couldn't figure this one out. I NEED my taxable to last me from 55 to 59 1/2 when I hit my 401k.
You may not even need it - if you retire in the year in which you turn 55, or later, you can withdraw from that plan without penalty. Caveats: 1) you can't retire say at 53 and wait; 2) it only applies to that employer's plan (although you can roll other 401ks/IRAs into that plan); and 3) apparently some employers don't make this possible even though the IRS allows it; my understanding is that most plans do allow this.
Topic Author
fundmental
Posts: 7
Joined: Thu Nov 22, 2018 10:52 am

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by fundmental »

aristotelian wrote: Wed Jan 26, 2022 1:28 pm Unless I missed it, we still need to know:

-Current marginal tax bracket
-Annual spending in retirement
-Current annual savings contributions

It is unusual to see such a high 401k balance with relatively few dollars in taxable and no Roth. I can see why you would be concerned about tax on distributions but it is still impossible to say without knowing your current marginal tax rate and how much you will need to withdraw annually.

What is "mortgage payoff fund"? If that is in risk assets, with a fairly short time frame you are taking a big risk by not paying down the mortgage now. If that is in cash or bonds, you would be better off paying down the mortgage immediately.
Thanks for your reply.

Here are my responses:
-Current marginal tax bracket: 32%
-Annual spending in retirement: the scenario I use (when we retire) is $172k annual expenses, including beach home mortgage (3% APR til 2050 if not paid early)
-Current annual savings contributions 401k 55K annual on average for me, wife does the max each year to her company's 401k; lets call it $75k total
-Current taxable savings contributions: can vary with my business income per year; on average $50K

The reason my taxable account is much lower (and the reason I am not retired at 51) is the choice to own a beach home (consumption item) starting in 2002. When I traded up in 2014 to a beach front home, I knew and accepted the opportunity cost of mortgage payments on my taxable accounts then.

The mortgage payoff fund: Rather than paying down low-interest mortgages, I've spent the past several year investing in the total stock market index fund. While it is a risky alternative, it has resulted in very good returns over the past 10 years (14.5% 10Y trailing return), and my plan is to use this to pay off the primary mortgage. Although not part of my contingency (emergency) fund, this fund could also be used for other uses as a last resort, but I am disciplined not to touch it.

My 401k was setup last year using a transfer from a SEP-IRA. I have a Roth-IRA option but have not used it because I am in my peak earning years. I believe I have put enough away to reach 3.5M to 3.8M, and with my expenses and projection tests I never see that balance fall below $3M using numbers I've already given. My question to this board is still about stopping 401k contributions from this point forward, taking the tax hit so I can use the money if I want to splurge next year or the year after. Not wait 9 years when I retire.
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by aristotelian »

fundmental wrote: Thu Jan 27, 2022 1:05 pm
aristotelian wrote: Wed Jan 26, 2022 1:28 pm Unless I missed it, we still need to know:

-Current marginal tax bracket
-Annual spending in retirement
-Current annual savings contributions

It is unusual to see such a high 401k balance with relatively few dollars in taxable and no Roth. I can see why you would be concerned about tax on distributions but it is still impossible to say without knowing your current marginal tax rate and how much you will need to withdraw annually.

What is "mortgage payoff fund"? If that is in risk assets, with a fairly short time frame you are taking a big risk by not paying down the mortgage now. If that is in cash or bonds, you would be better off paying down the mortgage immediately.
Thanks for your reply.

Here are my responses:
-Current marginal tax bracket: 32%
-Annual spending in retirement: the scenario I use (when we retire) is $172k annual expenses, including beach home mortgage (3% APR til 2050 if not paid early)
-Current annual savings contributions 401k 55K annual on average for me, wife does the max each year to her company's 401k; lets call it $75k total
-Current taxable savings contributions: can vary with my business income per year; on average $50K

The reason my taxable account is much lower (and the reason I am not retired at 51) is the choice to own a beach home (consumption item) starting in 2002. When I traded up in 2014 to a beach front home, I knew and accepted the opportunity cost of mortgage payments on my taxable accounts then.

The mortgage payoff fund: Rather than paying down low-interest mortgages, I've spent the past several year investing in the total stock market index fund. While it is a risky alternative, it has resulted in very good returns over the past 10 years (14.5% 10Y trailing return), and my plan is to use this to pay off the primary mortgage. Although not part of my contingency (emergency) fund, this fund could also be used for other uses as a last resort, but I am disciplined not to touch it.

My 401k was setup last year using a transfer from a SEP-IRA. I have a Roth-IRA option but have not used it because I am in my peak earning years. I believe I have put enough away to reach 3.5M to 3.8M, and with my expenses and projection tests I never see that balance fall below $3M using numbers I've already given. My question to this board is still about stopping 401k contributions from this point forward, taking the tax hit so I can use the money if I want to splurge next year or the year after. Not wait 9 years when I retire.
At 32% current tax bracket, I have a hard time imagining a scenario where you'd be withdrawing at a higher tax bracket than that in retirement. You will be able to withdraw close to $200k annually from your 401k without even getting into the 22% bracket. You plan to retire at 60, so you have no worries about needing liquid funds outside of your retirement accounts. I'd still max the traditional 401k.
Admiral
Posts: 5039
Joined: Mon Oct 27, 2014 12:35 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by Admiral »

fundmental wrote: Thu Jan 27, 2022 1:05 pm
aristotelian wrote: Wed Jan 26, 2022 1:28 pm Unless I missed it, we still need to know:

-Current marginal tax bracket
-Annual spending in retirement
-Current annual savings contributions

It is unusual to see such a high 401k balance with relatively few dollars in taxable and no Roth. I can see why you would be concerned about tax on distributions but it is still impossible to say without knowing your current marginal tax rate and how much you will need to withdraw annually.

What is "mortgage payoff fund"? If that is in risk assets, with a fairly short time frame you are taking a big risk by not paying down the mortgage now. If that is in cash or bonds, you would be better off paying down the mortgage immediately.
Thanks for your reply.

Here are my responses:
-Current marginal tax bracket: 32%
-Annual spending in retirement: the scenario I use (when we retire) is $172k annual expenses, including beach home mortgage (3% APR til 2050 if not paid early)
-Current annual savings contributions 401k 55K annual on average for me, wife does the max each year to her company's 401k; lets call it $75k total
-Current taxable savings contributions: can vary with my business income per year; on average $50K

The reason my taxable account is much lower (and the reason I am not retired at 51) is the choice to own a beach home (consumption item) starting in 2002. When I traded up in 2014 to a beach front home, I knew and accepted the opportunity cost of mortgage payments on my taxable accounts then.

The mortgage payoff fund: Rather than paying down low-interest mortgages, I've spent the past several year investing in the total stock market index fund. While it is a risky alternative, it has resulted in very good returns over the past 10 years (14.5% 10Y trailing return), and my plan is to use this to pay off the primary mortgage. Although not part of my contingency (emergency) fund, this fund could also be used for other uses as a last resort, but I am disciplined not to touch it.

My 401k was setup last year using a transfer from a SEP-IRA. I have a Roth-IRA option but have not used it because I am in my peak earning years. I believe I have put enough away to reach 3.5M to 3.8M, and with my expenses and projection tests I never see that balance fall below $3M using numbers I've already given. My question to this board is still about stopping 401k contributions from this point forward, taking the tax hit so I can use the money if I want to splurge next year or the year after. Not wait 9 years when I retire.
You will need roughly $4m at that spend rate, and that's assuming at least $80k of social security at both age 70s (unless you also have a pension). $172k after tax is a very rich retirement budget but perhaps doable if you keep saving.

If you've maxed out retirement (which for two 50 year olds would be $54k, and I guess you are getting a match?) and the SEP is no longer available to shelter business income, then I would suggest either shifting some of that pre-tax to Roth (assuming employer plans allow it) or considering moving that taxable to Roth IRA via backdoor (since you are well above the phaseout). This does not prevent you from "splurging" whatever that means.

You keep asking the same question and have gotten the same answer a few times:

Giving up a 32% deduction in favor of taxable makes zero sense. Roth is a better choice.

But, it's your money and your life so do what makes you happy. Paying more tax than needed won't kill you. With such a high spend rate, you will be spending down the pre-tax account considerably before RMDs are due, if that's what worries you.
runningshoes
Posts: 231
Joined: Thu Apr 08, 2021 3:48 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by runningshoes »

aristotelian wrote: Thu Jan 27, 2022 1:23 pm
At 32% current tax bracket, I have a hard time imagining a scenario where you'd be withdrawing at a higher tax bracket than that in retirement. You will be able to withdraw close to $200k annually from your 401k without even getting into the 22% bracket. You plan to retire at 60, so you have no worries about needing liquid funds outside of your retirement accounts. I'd still max the traditional 401k.
+1 to this. Everything else in your notes is really "noise" as it doesn't change the basic tax rates question. Perhaps a middle option is to keep saving and if you do buy the other half of the property, take a loan / mortgage on the total unit, and use some of the cash to keep funding retirement and a portion to pay the mortgage.
Topic Author
fundmental
Posts: 7
Joined: Thu Nov 22, 2018 10:52 am

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by fundmental »

runningshoes wrote: Thu Jan 27, 2022 2:01 pm
aristotelian wrote: Thu Jan 27, 2022 1:23 pm
At 32% current tax bracket, I have a hard time imagining a scenario where you'd be withdrawing at a higher tax bracket than that in retirement. You will be able to withdraw close to $200k annually from your 401k without even getting into the 22% bracket. You plan to retire at 60, so you have no worries about needing liquid funds outside of your retirement accounts. I'd still max the traditional 401k.
+1 to this. Everything else in your notes is really "noise" as it doesn't change the basic tax rates question. Perhaps a middle option is to keep saving and if you do buy the other half of the property, take a loan / mortgage on the total unit, and use some of the cash to keep funding retirement and a portion to pay the mortgage.
Thank you all for the replies. And after re-reading my questions, I deserve the label "noise" applied to my extra notes. Before my original post, I had done a lot of rethinking which has probably been overthinking (noise). I agree now that it still makes sense to max my solo 401k and reduce my S-corp pass-through income. And your point that I could take a loan/mortgage should we buy the other condo unit is true, and it's not as bad as I once thought. My 30 year old self had a plan where I would have no mortgage in retirement, but I've softened my convictions on that with the 2nd home. Regardless, my 32% marginal tax bracket today makes funding the solo 401k the only sensible option given our timeframe. Also, for simplicity - I plan to use a lower real rate of return, like 2%, on portfolio performance to keep my projection conservative.
yourbuddy
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Joined: Sun Oct 24, 2021 6:09 pm

Re: Should I Stop Retirement Contributions? A behavioral finance dilemma

Post by yourbuddy »

I didn't see this mentioned, so I thought I'd note with a large pre-tax nest egg, you might want to look at what happens if one of you survives the other and has mandatory RMDs combined with a single filer tax bracket.

That may make it worthwhile to do Roth conversions from ages 60 to 72 to reduce your RMDs.

Kirk
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