Anyone here NOT maxing out their 401Ks or IRAs

[Jluke]

I have one more paycheck left where I will contribute 6% to the 401k. After that the plan is to get back on track to max it out by the last paycheck of the year. So that’s around 20%.

The way I am wired it feels irresponsible to not go for the max amount allowed. I have a lot of eggs in the 401k but when it can grow like it does it’s hard not to contribute the max.

[disneysteve]

I 'm no longer employed .. but when I was .. I refuse to put all my eggs in the 401k basket.

The one significant downside to putting a big chunk of your savings in a 401k is that you can't access it without penalty until you're 59.5. If you're planning to retire earlier than that, you need to make sure you have adequate savings outside of that account to carry you until then.

Of course, there are also tax implications. That's why common advice is to contribute to the 401k up to the max match, then fund your Roth, then go back to the 401k.

[srblanco7]

The one significant downside to putting a big chunk of your savings in a 401k is that you can't access it without penalty until you're 59.5. If you're planning to retire earlier than that, you need to make sure you have adequate savings outside of that account to carry you until then.

Of course, there are also tax implications. That's why common advice is to contribute to the 401k up to the max match, then fund your Roth, then go back to the 401k.

Noting that there are a couple of avenues to access 401k funds prior to 59.5 without penalty - the rule of 55 and SEPP (IRS rule 72t). I'll likely take advantage of one of these exceptions to access funds once I retire. Though I also concur that having brokerage funds is a great avenue for funding an early retirement.

I concur with what you note as conventional wisdom (401k match > Roth > max 401k) and in general its likely the approach that many of us have taken. Given the growing prevalence of Roth 401ks - I think I'd advise my kids to invest everything in Roth IRA and Roth 401k, especially early in their careers while they are in a low tax bracket.

[kork13]

Over the last year, my wife and I decided to stop maxing out my TSP (401k equivalent), even though it is easily and fully attainable for us. However, we are also planning to retire early, or at least want the flexibility to do so. That means we need to build up a bridge account for us to have enough to support ourselves before the retirement accounts can be cracked open. Maxing out the TSP and our Roth IRAs would mean putting about 20% of our income into retirement accounts. But we need some of that money outside of retirement, so we cut that down to only 15%. The rest is getting diverted into a taxable account.

This continuing discussion (particularly srblanco's comment about the SEPP/72t rules) combined with getting a positively refreshing random day off today (in the middle of an absolute storm of frenetic work) has me thinking alot this morning about early retirement, and reconsidering my earlier position about not maxing out our retirement accounts. Of course, those early retirement ponderings bring up alot of other considerations/questions, but that probably deserves its own thread....

Some napkin math says that once I hit 20 years & retire (1 Jun 2028...not that I'm counting...and I definitely don't have the date reserved in my calendar ), we'll likely have at least $90k/yr of stable pension & RE income -- mostly 2x military pensions ($20k DW, $58k me)...and only ~$50k living expenses. With a likely $40k+ delta before even considering any income from 2nd careers for DW (as a physical therapist) & I (maybe just stay-at-home-dad + minor part-time work?).... We don't even really need to build up a bridge account in taxable investments. With that in mind, there's really little reason not to go ahead and send into retirement the extra ~$6k/yr needed to max my TSP. We'll have plenty of income to support our early retirement, and we'll still be able to build up taxable investments over time for buying new rental houses, and if we really want to start tapping our retirement accounts, there's always the SEPP/72t option available. So we may as well just max out retirement.... right?

[disneysteve]

SEPP/72t rules

One important detail to keep in mind about the 72t rule is that payments are based on your life expectancy. If you're fairly young, like 50, your life expectancy might be 35 years or more making your payments pretty low. I know someone who was hoping to use 72t to fund early retirement but then found out that the amount he'd get wouldn't have been sufficient. He was able to juggle around some other things and still make it work fortunately.

As for your hypothetical, if you will have 90K or more of steady income from the pension and RE and your expenses will only be 50K, you'll be golden. I'd take that opportunity in a heartbeat.

[disneysteve]

Some napkin math

I'm embarrassed to admit how much retirement "napkin math" I've done in the past 2-3 months. I've burned through many, many napkins.

[kork13]

One important detail to keep in mind about the 72t rule is that payments are based on your life expectancy. If you're fairly young, like 50, your life expectancy might be 35 years or more making your payments pretty low. I know someone who was hoping to use 72t to fund early retirement but then found out that the amount he'd get wouldn't have been sufficient. He was able to juggle around some other things and still make it work fortunately.

As for your hypothetical, if you will have 90K or more of steady income from the pension and RE and your expenses will only be 50K, you'll be golden. I'd take that opportunity in a heartbeat.

Very true, and I'm right there with you for napkins -- lol. To that end, I actually did check a 72t calculator with conservative figures, assuming my (very reasonable) goal/estimate for $1M in IRA/TSP accounts by age 42.... Result said roughly $35k/yr, which is actually more than I expected it would tell me (closer to $20k/yr). **ETA: Looking again, I actually guessed better than I thought -- $20k/yr would be the minimum allowed, $35k/yr would be the maximum allowed.

Really, the best news is that this is a very likely "hypothetical" scenario. DW already has her pension, we already own the two homes, we have $650k in retirement right now, and I'm doing well in my career with almost no reason to expect that I'd have to get out before retirement (failure to promote, losing end of an early separation board due to too-high officer retention, etc.). If that 5% chance worst case happened, we could likely make it even then, given DW's $20k & that $35k/yr SEPP, plus some part-time work. In any case, it's enough of a "sure thing" (recognizing there really aren't many absolutes) that I went ahead and made the changes this afternoon to increase my Roth TSP to the max contribution again, and reducing our automatic taxable investments somewhat to match.

[disneysteve]

I love how the conversations on this board have evolved over the 15 years I've been here. When I joined, a lot of us were talking about having kids and saving for college and buying homes and advancing in our careers. Now quite a few of us are either already retired or rapidly approaching that point. I'm very grateful for all of the advice and input I've gotten here over the years.

[QuarterMillionMan]

The IRS maximum limits are too low IMHO. Combined Roth IRA & 457 (or 401k, 403b, etc) for a 50+ person is $31,000. I wish the IRS would raise it to double that amount. If I had a high deductible health plan I would max that HSA out as well at $3600. I don't have kids so no 529 which I would max out as well. If I'm missing any other savings plans please enlighten me.

[Scallywag]

The IRS maximum limits are too low IMHO. Combined Roth IRA & 457 (or 401k, 403b, etc) for a 50+ person is $31,000. I wish the IRS would raise it to double that amount. If I had a high deductible health plan I would max that HSA out as well at $3600. I don't have kids so no 529 which I would max out as well. If I'm missing any other savings plans please enlighten me.

I thought the MAX combined ROTH + 401K was $33000 for someone aged 50 and above? ROTH IRA contribution is $7000, whereas 401K upper limit is $19500, and the "catch up" contribution is $6500? Did I get this wrong?

[Scallywag]

I have another question here.

One reason we're prioritizing down payment is that we're both older and we're concerned that it may be more difficult to get a mortgage once we're above 50 (and have less than 20 years to retirement)! Does anyone know if this is accurate? We were spoiled brats when we were younger and previously had a checkered credit history (which we've "cleaned up" since "discovering" Dave Ramsey several years ago). We also took savings & retirement much more seriously after our son was diagnosed with autism (severe end of the spectrum) AND when I realized I may not get a large inheritance from my parents.

All this to say, that's why it's taken us so long to get into a home of our own and we're really concerned that age may restrict our ability to buy a house! Anyone know anything about this?

IF we made more / better money, we'd have LOVED putting the max in the 401K. DH now says that he does not want to retire before age 70. He's not exactly a workaholic but we're both worried about our son and want to have an income for as long as possible so that we don't have to "eat" into our retirement until ABSOLUTELY necessary so that our son eventually gets as large an inheritance as humanly possible, given our significant limitations.

It's a different ball game because we're saving for our retirement AND his retirement (something the vast majority of people - THANKFULLY - do not have to do). The only reason we even need a home of our own is to protect ourselves against ever rising rents. Yes, we'll have to be pay taxes and insurance and be responsible for all the maintenance, but a nice yard, and a stable mortgage payment for the next several years would be nice.

I just worry that getting that mortgage may be very challenging for those above 50.

[kork13]

I just worry that getting that mortgage may be very challenging for those above 50.

FWIW, age cannot legally be used as a discriminating factor in granting or denying a mortgage (prohibited by the Fair Housing Act). Almost without exception, it's solely based upon credit worthiness, income, and ability to pay (based on the size of the mortgage).

That said, I stand by the original recommendation that you focus toward getting into the home in lieu of retirement savings for a brief period of time. You can spend just 2 years building up a hefty down payment, put it on a 15-yr fixed mortgage to ensure it's paid off BEFORE you retire, and then for those 15-20 years, you can easily build up the retirement savings you and your son will need. Over that time, the home will increase in value as well, and will provide more assets available for his care upon your eventual passing.

[disneysteve]

The IRS maximum limits are too low IMHO.

I've always said the IRA limits were way too low. Only about half of workers have access to a 401k, which has much more generous limits. I think that if you don't have an employer plan, you should be allowed to put as much into your IRA as what you'd be allowed to put into that employer plan.

I think the 401k limit is reasonable. $19,500 represents 15% of $130,000 which is the 90th percentile of income so the vast majority of workers earn less than that and won't ever max their 401k accounts. Plus for the 50+ crew, the number is even higher.

But $6,000 to an IRA is 15% of just $40,000 which is the 46th percentile. That limit should be way higher.

[disneysteve]

I just worry that getting that mortgage may be very challenging for those above 50.

Based on my personal knowledge alone, this is a non-issue. If you qualify, you qualify. Nobody cares how old you are. My cousin lives in a 55+ community in Florida. Homes there start around 450K and run into the 700s or more. They can't sell them fast enough. And the builder has since built several more communities in the area with even higher price tags, some going well over the 7-figure mark, and they sell out as fast as they can build them. Every single buyer is 55+, some are well over that into their 70s and beyond. Nobody seems to have a bit of trouble getting a loan.

[Scallywag]

FWIW, age cannot legally be used as a discriminating factor in granting or denying a mortgage (prohibited by the Fair Housing Act). Almost without exception, it's solely based upon credit worthiness, income, and ability to pay (based on the size of the mortgage).

That said, I stand by the original recommendation that you focus toward getting into the home in lieu of retirement savings for a brief period of time. You can spend just 2 years building up a hefty down payment, put it on a 15-yr fixed mortgage to ensure it's paid off BEFORE you retire, and then for those 15-20 years, you can easily build up the retirement savings you and your son will need. Over that time, the home will increase in value as well, and will provide more assets available for his care upon your eventual passing.

They probably won't use age, but our former credit issues as reasons to deny credit. I wouldn't blame them because we did **** up big time before we found Dave Ramsey. But it still worries me, even though our credit has really turned around and the last derogatory should fall off in 2022.