How Much Do You think You Need to Retire? What Age Will You/Spouse Retire? Investment and General Retirement Issues (Part 3)

Parent Cafe
2641

Interested to hear from others that are 60+ in age on how they are in their retirement planning (and if already retired too, if they would change anything - or changes they have made in retirement) and what tax planning they have done on the years between retirement and RMD (Required Minimum Distribution) – if they shifted some funds into their own investment accounts (outside of retirement funds) during lower tax years before the RMD, or what was done with extra funds moved out of retirement accounts to lower amount there at RMD time (level off the tax burden).

We hit RMD in a few years, and we are both retired. On a few prior years, we shifted some funds from 401k into Roth IRA. Our FA manages our Roth IRAs, and those are the funds to be spent down last.

Recently we have shifted 401k money into our own investment account (so had to go from DH’s 401k into a new IRA, then IRA into our investment account). The investment account provides us funds for any transitions we have where we readily need funds - for an out-of-state home move for example. Funds outside of our checking account (we have not set up a separate emergency fund, but keep a healthy balance in our checking account out of convenience).

Hopefully this is the right place to post this question. I don’t want to get scolded.

Taking on a little more with having these funds be invested and managed by us, so a little learning curve. We manage the 401k, and there are limited investments - and we have rebalanced recently to get the best long-term results.

We have pretax retirement annuities as well. The majority of retirement funds are pre-tax.

2642

Yours is a pretty generic question, and I think there are many “right” answers to retirement planning/managing money in retirement. I do think simple is better. I have NOT moved any money out of my “retirement” fund (the federal TSP). If you’re paying taxes to move money out of your retirement account, I’d put it in Roth. That way if you don’t use it you’re going to not have to pay tax on any earnings. I have also not done much in the way of Roth conversions, but I have thought about it, and done some research. IF you have low income years, then I would suggest doing Roth conversion. I have considered moving a less aggressive balance of funds, since I am not longer earning. If you’d like suggestions for what you could be doing better, bogleheads is a great forum. If you outline your portfolio and life circumstances kind of things, you will get pretty good feedback.

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2643

My daughter’s employer is adding a 403(b) Roth as a savings option for next year. It is interesting in that there are no income limitations, any company match will be pre-tax and kept separate from the employee’s post-tax funds. and no RMDs or tax on withdrawals.

She is looking for my advice on if she should put any money into this fund. The options are to either keep putting money up to the company match amount in a traditional 403(b) or do that and add some money into the new Roth 403(b). She makes too much money to put funds into a traditional Roth IRA. If I am reading the rules correctly the limit of contribution amount is combined for the 2 types of 403(b) account (post and pre-tax).

Anybody have any experience with this type of account, any recommendations (daughter is 31).

2644

This sounds similar to a Roth 401(k) plan.

I think we would need more info to respond. Does she have excess funds to contribute?

You said that she earns too much to contribute to a traditional 401(k), which if I understand what I am reading suggests that she earns more than $89K as a single filer who is covered by an employer retirement plan.

Depending on her salary and free cash flow, my suggestion would be to contribute to the employer match to the Roth 403 (b), then if she earns less than $150K, she could contribute $7K to an individual Roth IRA, and if she still had excess funds, contribute to the plan max of $24,500 in the 403(b) Roth.

If you pop over to Bogleheads, you will find dozens of threads debating this topic. I lean toward all Roth to the top of the 24% bracket, but there are so many variables to consider. MANY on the Bogleheads site seem convinced that a young person earning in the 24% Fed will have a lower tax rate in retirement. Ignoring the size of our deficit, I find it hard to imagine a situation where a 25 year old earning $150K will not continue to see steady compensation increases, so that future marginal brackets will be higher than 24%.

Things to consider: future savings goals (does she need this money for a home purchase?); marriage (married tax filing bracket); does she live in a state with high income tax rates and think she will retire to a state without income tax? And others, that I am not considering.

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2645

We have no pensions, and DH’s 401k plan has some very good investment options which we have utilized. Great that you are happy with your TSP. DD1 is a federal employee (works for a VA hospital) and she is building up her retirement plan (employed with the VA 9 years now); she is confident in her decisions and returns. I help DD2 who has a Roth 401k with her work and has a Roth IRA investment account. DD2 had worked as a state employee, and she had her funds rolled into a Fidelity IRA and then into a Fidelity Roth IRA - Fidelity has been easy to work with on this, and we found them also easy to work with on our situation.

We want to ‘draw down’ some of DH’s 401k over the years prior to RMD. This is the first year we are doing this instead of having some funds convert to Roth. We also will use the money sometime in the near future (at least it is easily accessed as our own investment money) - and also build up investments outside of pre-tax retirement funds. Yes, we can spend our Roth IRA funds - but the intention is that is part of legacy funds. As soon as we hit RMD, we have to withdraw certain funds from our pre-tax retirement funds as it stands (easiest access is 401k, although we do have monthly cash stream from our pre-tax annuities and can look on the years they mature).

I also like simple but want to have our investment money work for us in the best ways possible.

Now that we have set up DH’s IRA account with our investment place Fidelity, the movement of money in future years is easy. We have to leave $150 in this Fidelity IRA account, but have moved the rest of what we wanted to move from 401k to there, and from IRA Fidelity account to our joint investment account with Fidelity.

Have to pay taxes at some point, and better for us to pay taxes during the years it is a good fit for us (prior to RMD). RMD will require what minimum funds we need to withdraw each of those years and of course the corresponding taxes.

I suspect we will be moving and purchasing another home before either daughter does - and we have more freed up funds to be used in ways we choose for ourselves and our family. We intend to sell our current home first but will have moving costs and may (most likely) be paying more for the next home. We don’t want to have a mortgage unless it makes sense for us at the time.

Not that I wanted to figure out investment choices now (during holiday preparation and travel season) along with the money transferred, but it is a priority. Stopping every so often in the year to review investments (more than the bottom line each month). Reading up and studying choices, letting things soak in, and more as days go by. I have wanted to initiate ‘figuring this all out’ on our current money move, and now is the right time.

I have been separately noting monthly and quarterly 401k movements since 2019/2020. Looking at 401k monthly/quarterly/yearly returns over the past few years, looking to see any patterns.

2022 had everyone surprised in January, and our worst quarter that year was with -17.08% returns; also the only quarter with positive performance was 4th quarter in 2022 but even then it had negative December and big negative for the year. First 6 months of 2023 we had a 17.63% overall return and year return of 25.89%. 2024 had year return of 23.38%.

We kept too much money in a small cap growth account this year that pulled our overall returns down - so those funds got moved this last week. Pretty modest returns for this year in part due to the one fund; that one fund was OK at the start of the year; it had a -10.98 for the year by mid-August, but I had hoped (based on past performance) it would ‘bounce back’ but instead it continued to slide for a -18.48 YTD by Nov 13. Cut our losses. Our 9- month overall return for the year is 6.10%, and October and November look good so far.

I put in a few more numbers on the retirement planning tool (associated with 401k account), putting in current social security and our balance sheet net worth. We went from 15% of the goal to 999%. I may have had a modest monthly spending indicated - and we went from a $42,369 income gap (budget for the year) to no income gap. I didn’t like seeing the low percent of my goal every time we looked at the 401k account (that is the first thing on the page with the total account balance with 401k).

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2646

You mentioned looking to see any patterns in your investment returns, studying choices, switching funds because they had a short term loss, and hoping funds would bounce back then cutting losses when they did not. I’m curious how this type of strategy compares to the long term return you would have achieved from simply holding a low fee, total market type index fund (for equity portion of portfolio) and not changing anything. For a variety of reasons, the latter strategy yields a higher long term return for the vast majority of investors, particularly if measured on a risk adjusted basis.

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2647

She has extra money (which she puts into traditional investments now). She is already putting the max that her employer will match into a traditional 403 plan and will continue doing that (to take advantage of the tax break).

The question is should she make additional deposits into the newly offered roth 403 plan - they will not be employer matched, will be post tax, and will follow roth 403 rules (not the same as roth ira rules).

She has already accumulated a good amount of savings which would most likely allow her to purchase a house if and when she decided to. Who knows about marriage, which I believe would definitely lower her tax bracket (currently in the 24% bracket).

2648

I have a question. Does your daughter already have traditional IRA contributions? If not, she could definitely contribute to a backdoor Roth IRA. Basically, you contribute to a traditional IRA, don’t take the deduction, and immediately convert to a Roth. Gives her the extra space of tax advantaged retirement.

If she does already have traditional IRA holdings, then I might recommend using the 403(b) Roth vehicle for extra savings. Unless she is already maxing out her 403(b) pre-tax amount in which case - keep maxing it out pre-tax and look into opening a taxable account.

While it is awesome that she has been saving in tax advantaged retirement accounts, it is also a good idea to build some taxable holdings as well. The earlier you do this, the better (imo). As we’ve gotten older, we’ve realized the extra challenges in having so much in tax advantaged relative to our taxable holdings. A nice problem to have, but a problem nonetheless. It would be a good idea for her to head over to the Boglehead site for help in putting together taxable holdings. There are tax advantages to be had in a brokerage account as well - a little research is super helpful.

Another resource she might find helpful is www.moneyguy.com. Brian and Bo also have a youtube channel, they are incredible kind and thoughtful with how they present these topics. They also have a really helpful worksheet they call the FOO - Financial Order of Operations. It is a 9 step cheatsheet of how to save and manage your money. It is available for free on their website. I’ve sent all three of my kids their FOO sheet. The only place I disagree with Brian and Bo is that they are financial advisors who charge AUM fees. So I wouldn’t put my money under their management, but their advice is top notch.

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2649

If I understand your D’s situation correctly, the question is where she should put excess after tax savings. It becomes a question of how much she values liquidity and how much she already has in savings. For managing her future tax liabilities, the Roth 403 is clearly more advantageous as all future cap gains are sheltered and not taxed even on withdrawal vs cap gains that will have to be paid on regular savings when sold (either for use or changing investments). I guess she would also want to consider what type and variety of investments are available in the Roth 403.

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2650

I know nothing about Roth 403(b) plans but a quick internet search suggests that they are similar to Roth 401(k) plans, but with more limited investment opportunities. The articles I saw mentioned annuities contracts as the investment vehicle—another topic I know nothing about. So I think we need someone informed to weigh in!

If this were a question about Roth 401(k) plans, I would be all in. I advise my children to invest the full $23,500 in the Roth 401(k), while they’re in the 24% bracket. The decision to invest in Roth 401(k) versus traditional 401(k) is a tax arbitrage one: does she think she will be in a higher marginal tax bracket at retirement age or lower than 24% + whatever her state tax rate is?

It sounds as though she is not currently maxing out the full $23,500 allowed by her employer plan, but instead contributing the amount required to obtain the match and then depositing excess funds in a brokerage account. Is that correct? If that is what she has been doing, then contributing to the Roth 403(b) would allow her to never pay taxes on the earnings on that post tax money, however her investment choices will be limited to those offered by her employer plan.

2651

Looks like the Roth 403 b will be managed by Fidelity, who manages the traditional 403 b plan. They have plenty of investment options (different mutual funds, etc.) And yes, she has been putting her non matched savings in traditional places where she pays taxes on the earnings (CD, brokerage, etc.)

My husband and I (now retired) always maxed our 401 K contributions (even doing catchup ones as we got older), to get tax advantages. We are now in the position where our RMDs will be so big (still a few years out as we are 65/66), that they will most likely cause us to be in a high tax bracket during those years (yes, I know first world problem - too much money).

2652

I wasn’t clear on if the daughter’s income exceeds the direct Roth contribution or the IRA contribution, as I think Roth is around $150K and IRA is $90K when covered by an employer plan. I may be misinterpreting this and if so, I hope someone corrects me. If income is in excess of Roth IRA contribution limit, and as you said, if the D does not have an existing IRA account balance, I would definitely go the back door Roth approach. (I have a great write up on how to enter the information in TurboTax, if anyone wants it.)

2653

Roth did not exist when you and your H were in your lower tax bracket years, but it sounds as though you clearly understand the implications of only funding pre-tax accounts. I can’t recall all the discussions on this thread, but I imagine you understand the looming tax hit after the first spouse dies.

I am repeating myself, but I like Roth at least to the top of the 24% bracket for young people who will hopefully earn more with each passing year. I don’t know if her compensation is lockstep/negotiated. (I don’t know who is covered by 403(b) plans and income potential.)

Once her income exceeds the top of the 24% bracket, evaluate a pivot to pre-tax. Her pre-tax account will continue to grow with the employer matching funds. (One of my children has a 50% match, which is insane.)

Since she already has established savings, she can contribute up to the federal limit. We did not discuss HSAs here. If she is enrolled in a high deductible health plan and has access to an HSA, I would prioritize that above everything else other than the employer match.

2654

The beauty of the Roth 403 b is that it can be used by highly compensated employees - no income limit. So no need for back door IRA Roth - you just do this Roth 403 b instead.

2655

A highly compensated employee who wants to save more than $23,500 can do a backdoor Roth for an additional $7000—which will be $7500 next year.

So, $23,500 in 403b, $7K to non-deductible IRA then immediately converted to a Roth IRA. In order to take full advantage of the back door Roth, one needs to not have any existing IRA balances–or be ready to suffer the tax consequences. Might be worthwhile, depending on how small the existing IRA balance is.

2656

She has a 401 plan with her current company (in addition to these 403 b plans they offer), so she has an existing IRA balance (plus a second one from a prior employer).

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2657

Sorry I was unclear. Her existing company pre-tax account is fine–no issue.

Can she roll her prior employer IRA balance into her current employer IRA plan? If so, then she will not have an individual IRA balance, which is probably the term I should’ve used. (I am not a financial professional, so I understand the rules, I’m a bit loose with the terminology!)

2658

Our kids both have financial planners who specialize in their fields of work. One is in a medical field and one is a self employed musician. Their retirement planning looks very different.

We had asked our financial planner company if they would be able to work well with either of our kids. They strongly suggested these kids use someone who specializes in their career fields. So they did. This is something to consider.

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2659

How do you find one with that specialty. Asking for the mom of a creative.

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2660

Both of my kids reached out to mentors in their fields who were at or near retirement, and that gave them some ideas. Both interviewed a couple of different folks before choosing who they went with.

In the case of one kid, a former college classmate had become a financial planner specializing in the field.

In the second case, recommendations from a program director helped.

So…my suggestion…have your creative one reach out to some folks in the field who are already in the retirement planning stage…and get some suggestions.

Adding…both of our kids could have also looked at advice from their specific unions. But they felt a personal reference was a better way to go.

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