Steerpike

I think there are income limitations for Roth IRAs and I think I fall into those limitations; been a while since I looked into it.

Well, your last sentence is where you hit the nail on the head for me - it's the difference in tax rates that matter to me. Right now, I make way more money than I need, so I'm going to save it one way or another (well, I could spend money like a maniac, but I'd rather prepare for a leisurely future!). The question is, do I save it 'after tax' or 'before tax'. I have done some pretty detailed planning, and I believe I will only need to draw out about 50% of what I'm making now, once I retire. So getting the tax deduction now is a plus. If I were living paycheck to paycheck it would be a whole different story.


EDIT: http://en.wikipedia.org/wiki/Roth_IRA - max you can contribute to a Roth is about $4k, and your ability to contribute falls off once your AGI gets above $100k. 401k has a contribution limit of about $15k and there is no practical upper income limit I'm aware of.

Longy

I thought they were planning on making changes to the Roth, but haven't looked into it, it may be that you will be eligble for it in a few years.

Yep, that makes sense, its just the way some people talk about it as if benefitting them now, and its not really

Longy

Well most people don't have the ability or even want to research the funds the money is put into, they just stick it into 4 or so of the 10 funds on offer. Putting the money into an IRA just creates confusion as suddenly there are loads on offer and these I imagine could charge all sorts of fees. Rolling over to a company 401k removes this confusion.

Not saying its the right thing to do, but I can understand why people do it.

Giantaxe

Another big plus - especially the further you are away from retirement - is that earnings and capital gains on investments aren't taxed until they are withdrawn. Thus you are getting the benefit of compounding without taking a yearly hit from taxes. To me a 401(k) is essentially a no-brainer.

md95065

It is almost certainly a "no-brainer" if you intend to stay in the US permanently, but if you are only going to be here for a few years then the hassles associated with having some of your retirement savings tied up in a 401K plan in the US might outweigh the financial benefits.

nun

I think its important to have a cushion in after tax savings before you think about retirement. Having 6 months expenses easily available makes it easy to sleep at night.

If you are considering ERing (Early Retirement) it's important to have money in after tax investments so you have income to bridge the gap between retiring and 59.5. You can get at your IRA money before 59.5 without penalty by doing a 72T withdrawal, but this locks you in to set payments which might be an issue if you have a number of down years in the market. I'm not planning on the 72T instead I've saved into retirement accounts and also saved after tax in mutual funds. I'm not maximizing my tax deferral, but I like the added liquidity it gives me.

Whether you need to increase your after tax savings will depend on your retirement senario. Remember the safe withdrawal rate from your retirement accounts should be 4%. I'd sit down and estimate how much income you'll need and when you want to pull the plug on the rat race. Many retirement advisors will say you need 80% of your income in retirement. For most people planning on ER this is a massive over estimate as they live on way less than their take home pay anyway (there's a strong frugal streak in the community) and housing costs are often low as the mortgage is paid off.

For more info go to the forums at

http://www.early-retirement.org

there's lots of info on saving, invetsing and withdrawal strategies.

aceastwood

Which is bollocks advice. The money you will need in retirement relates to what you will spend, not what you currently earn. Example: person A earns $100k after deductions and spends all of it. Person B earns $120k and spends $75k. By standard advice person A will be told they will need $80k in retirement, which they cannot live off, while A will be advised that they need $96k when they currently spend nowhere near that amount.

nun

Exactly! What you need in retirement is related to how much you live off before retirement, NOT your income. The secret to financial happiness was plainly put by Mr. Micawber

"Annual income twenty pounds, annual expenditure nineteen pounds, nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

The amount someone has for retirement, rather than what they need, is another matter. Retirement financial success depends on two things, how much you save, what pensions you have etc, and how much you spend. Most people planning for ER find it easy to spend less than their income as that's what they've always done - its abbreviated as LBYM (Live Below Your Means). This can be difficult for many in the US because of the large number of poorly paid jobs without benefits.

Giantaxe

The big issue for many with early retirement is health care costs before Medicare kicks in. Unless you have continuing access to insurance through a spouse or continuing benefits from an employer,you'd better make very sure you have the assets to tide you over until age 65.

Steerpike

I have about 5 years of living expenses in after-tax savings, assuming a moderate lifestyle (that is, annual vacation, eating out regularly, etc - but not 6 months touring the world). Since I'm 49 now and employed, that would carry me through to 55 if I quit at the end of the year. So all I really need to worry about are the 5 years from 55-60. I could probably do the early withdrawal if I had to, or, get a minimum wage job to keep me going, or - move out of the Bay Area and live off the proceeds of the house sale (I've lived in the same house for 14 years, so the mortgage is minimal and the equity ridiculous).

My calculations are that I'll need approx. 35% of current income in retirement. That sounds low. Out of my current income, I currently pay about 35% in taxes (fed, state, FICA, medicare, SDI, etc), 10% in 401k, and another 20% in after-tax savings - a total of 65% in expenses I won't have in retirement, which leads me to think I can live of 35%. If I live on after-tax savings, there's no tax to pay. Once I start withdrawing 401k, there will be tax on that, so the 35% increases.

In reality, I'm a workaholic - I love my job, I'm good at it, and they pay me stupid amounts of money for it. I doubt I could stay away from a job, but - I do want to give it a shot! Having grown up in England in a single-parent family with absolutely no money (my mum had three shitty jobs just to put food on the table ... we 'ad it tuff, eh bah gum!), I live in fear of not having enough money and no matter how much I make, I can't bring myself to spend frivolously (I kept my last car for 15 years). My biggest concern is, I'm in IT/Software, which is notorious for early burn-out, and age-bias - so I feel that I need an exit-strategy!

Thanks for the forum pointer! Looks like a good read!

Steerpike

Absolutely! Medical costs are the giant wild card. I'd quit tomorrow if I thought I could cover medical costs regardless of health. Ironically, my health is fine but - the years from 50 to 65 are the most likely to be 'eventful' from a health perspective! This is why I will vote Democratic regardless of the tax consequences ... medical coverage is by far the biggest issue for anyone facing early retirement.

nun

Steerpike (great handle by the way), you sound as if you are well set. If you have 5 years of living expenses in after tax savings, it should last you longer than 5 years......if you can manage on the capital gains from that money and a part time job that would be one way to bridge the gap. The others would be a 72T, which I'm not a fan of, or selling the house to get at the equity and moving to somewhere cheaper, say a small place in Portland.....

Health care is a big cost and a big worry and my plan is to retire early back to the UK. There are pros and cons with this and I'm doing it mostly for family reasons, but at least I'll have health care.

nun

Your after tax savings should be earning money for you. They might be in CDs if you are conservative or in equities if you are more aggressive, but the idea is to limit how much principal you spend and live on the gains - you'll be paying tax on those of course. It would be a good idea to do the calculation to see if your principal will last until you reach 59.5 given a reasonable investment gain and your projected annual expenses.

Your frugality is a good indicator for success in managing your retirement finances. I'm similar in that I kept my last car for 15 years and 200k miles and I have a TV that I bought in 1989. I live on 40% of my salary, that includes everything, mortgage, car, food, insurance, beer........ The mortgage will be paid off in 5 years and then my expenses will go down to 15 or 20% of my salary.

Of course all this is only doable as I have a good job and I'm single and have no children.

My childhood was pretty grim too and I can offer the ultimate in hard luck stories.......I grew up in Middlesbrough

Steerpike

Well of course I'd like them to generate income but since they are short term funds, they are invested differently from my retirement funds. My planning assumes no return, so any return I get is extra.

Seems like we are in the same boat! I'm frugal with 'big things' like cars, and have no desire for (and wouln't wear if you gave me) expensive stuff such as Rolex watches, etc. But I do splurge on a few special areas such as photography - I have an unlimited budget for that (but then, a good camera can be had for $2k). I love food and have an unlimited budget for that too, but - I actually PREFER to eat in the more moderate places (family run, good atmosphere, good table wine, etc - usually get out for $50 for two). I don't like the over-fancy high end places where the food takes second place to bimbo hostesses and people scraping crumbs off the table every 5 minutes. Luckily the Bay Area in general, and Walnut Creek in particular, has an abundance of great dining experiences so I eat out at least 4 nights a week and love it. I bought a condo in SF in 1985 for $110k (when everyone said, "don't buy in SF it's too expensive" and "don't buy a condo they are a bad investment") and managed to trade up since then at little cost, to the point where I have a 2700 sq. ft. house worth over a million, with a mortgage of approx. $100k. All I can say is ... living in the Bay Area has been good for me!

Oh, we used to dream of livin' in Middlesborough! Would ha' been a palace to us! ... Four Yorkshiremen sketch ... I grew up in the northwest, which MUST be worse than Middlesborough ... Of course I didn't know it was a dump until I moved to the bright lights of London ...